Mandatory ESG firm and fund disclosures in APAC increase transparency

Traditionally a laggard in ESG reporting, APAC markets are implementing mandatory ESG reporting for public and private markets between 2022 and 2025

This year is certainly a watershed for ESG investing in Asia-Pacific (APAC). Over the past two years, China, Japan, Korea, and Australia have set targets to achieve carbon neutrality between 2050 and 2060, while India aims to do so by 2070. Accordingly, financial regulatory bodies in these key markets have mandated disclosures targeted at large, listed companies, as well as private capital funds, with many effective from 2022. Mandatory ESG disclosures lead to higher transparency, thus helping investors understand how portfolio companies and funds are incorporating ESG factors into investment strategies.

Traditionally, private capital firms in APAC are known to lag the US and Europe in ESG disclosures. Preqin’s ESG data shows that on a firm level, the average ESG transparency metric for APAC GPs is 8%, which trails that of the US (15%) and Europe (18%). The metric indicates the percentage of the 16 ESG policies tracked by Preqin that are adopted by firms in each region. 

The lag is partly due to APAC’s lack of unified regulation and standards compared with other regions. European countries have the EU Taxonomy, a classification system that establishes a list of sustainable economic activities, and the Sustainable Finance Disclosure Regulation (SFDR) which came into effect in March 2021 and requires European asset managers to classify their funds depending on how their investments integrate ESG. The SFDR also includes the more onerous principal adverse impacts (PAI) regime, which calls for firms to report extensively on ESG-related matters. 

Meanwhile, in the US, the Securities and Exchange Commission (SEC) recently proposed the broadest mandated corporate ESG data disclosure requirement at a federal level, which would enable investors to better conduct due diligence and simplify reporting expectations for firms. Funds are classified as ESG integration funds, ESG-focused funds, or impact investing funds, and have different requirements for reporting. For instance, ESG integration funds, which consider one or more ESG factors alongside other non-ESG factors, will be required to disclose how they measure carbon emissions, and how they consider greenhouse gas emissions. Funds with an ESG-focused strategy, and ESG as the main consideration, are required to provide an overview of their strategy.  

Asia-Pacific steps up requirements
APAC is moving quickly to mandate climate-related disclosures as well, guided by international standards such as the Global Reporting Initiative (GRI) and the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD).

Currently, most of the disclosure requirements are at the firm level since stock exchanges lead the implementation of mandatory disclosures in APAC. Most have ‘comply or explain’ policies for listed entities, which means that companies that do not follow the provided ESG recommendations must disclose that fact and explain why. Some are taking it a step further, implementing other mandatory disclosures. These include: 

• India: top 1,000 listed companies in India (by market capitalization) are to prepare a mandatory Business Responsibility and Sustainability Report (BRSR) based on GRI standards as part of the annual report by fiscal year (FY) 2022 to 2023.
• South Korea: companies listed on the main Kospi market with over KRW 2tn ($1.8bn) in assets must have ESG reports by 2025. All companies are to do so by 2030.
• Japan: large companies or listed companies on prime blue-chip stock market must disclose greenhouse gas and other emissions from April 2022. This will eventually expand to all companies that submit annual securities reports.

These mandatory ESG disclosures for public markets are a good start and can be extended to private markets. Indeed, Hong Kong’s Securities and Futures Commission has already mandated that from January 2022, funds that incorporate ESG factors as a key investment objective or strategy, including climate-focused funds, must have climate-related disclosures. Singapore’s Monetary Authority of Singapore also announced in February this year that it will introduce ESG-specific requirements on fund naming, prospectus disclosures, and periodic reporting disclosures at the fund level, and expects asset managers to ensure that their sustainability commitments reflect their practices on the ground. 

Private capital raising the bar
Overall, as there is still no unified global reporting system in place, rules surrounding reporting and disclosing for private companies in APAC are still fragmented. With most APAC public markets implementing mandatory ESG disclosures between 2022 and 2025, we expect that reporting will become more widely standardized. This will first be implemented across the board at the firm level, but also increasingly at the fund level. 

The International Sustainability Standards Board (ISSB)’s global sustainability reporting standards to be launched in June 2022 will lay out general requirements for disclosure of sustainability-related financial information. Investors will then be able to assess the financial performance and long-term ESG risks with greater clarity. 

For more insights on ESG investing, download our latest ESG in Alternatives 2022 report. Our newly launched Alternatives in Asia-Pacific 2022 report also provides an in-depth analysis of the region’s latest developments, including ESG investing efforts.