Asia Pacific Sees Growing Emphasis on ESG Disclosures

CFA Institute, the global association of investment management professionals, today announced in its latest report, ESG Disclosures In Asia Pacific that as the Asia Pacific investment community increasingly integrates material ESG factors into the investment management process, there has been a notable increase in demand for issuers to provide high quality, comparable and relevant ESG information. Regulators and stock exchanges are driving changes in reporting and disclosures by listed companies through policies, regulations and guidelines. Nevertheless, CFA Institute believes that much work remains to be done in the region to raise the overall quality and utility of ESG disclosures to the investment community.

According to the Global Sustainable Investment Alliance, global sustainable assets under management was US$30.7 trillion in 2018, compared with US$23.9 trillion in 2016, a rise of 34%1. Key Asia Pacific markets such as Japan, Australia and New Zealand accounted for 9.5% of the total, experiencing the highest growth rates.

“Asia Pacific markets overall have shown a growing awareness of the value of ESG integration in their investment decision making and management processes,” said Mary Leung, CFA, head, advocacy, Asia Pacific, CFA Institute. “Having said that, it is still unclear to many companies what ESG information investors would like to see and why, and how timely and consistent ESG disclosures can deliver strategic benefits to them,” she added. The value proposition of ESG disclosure needs to be better articulated to motivate issuers to strive for improvements, instead of treating it simply as a box-ticking exercise.

“We believe a more thorough consideration of ESG factors by financial professionals will improve the fundamental analysis they undertake. We focus on the quality and comparability of ESG information provided by issuers and will continue to monitor developments in this area and set the standard for professional excellence with credentials that encourage professionals to follow,” Ms. Leung explained.

Companies should stop treating ESG disclosure as a box-ticking exercise

In Asia Pacific markets, regulators and stock exchanges have adopted different approaches to reporting ESG information. Reporting is voluntary in some markets such as Australia and Japan, while in Hong Kong SAR and Singapore, the reporting obligation is on a comply-or-explain basis. China is on the cusp of moving from a voluntary disclosure regime to a mandatory one, with the introduction of mandatory environmental reporting in 2020. Across the region, there is a trend for tightening of reporting obligations, which has led to an increase in the volume of ESG disclosures.

In May 2019, the Stock Exchange of Hong Kong published a consultation paper in which it proposed, among other things, to introduce new mandatory disclosure requirements, to require boards of listed companies to provide an enhanced statement on the role of the board in setting ESG and sustainability strategy, to require disclosure of targets for environmental KPIs and to tighten the social KPIs reporting from voluntary to comply-or-explain.

However, not all disclosures are of high quality and useful to investors. Instead of treating this as a box-ticking exercise, issuers should recognize that the process of preparing ESG disclosure offers strategic benefits — for example to make boards and management become more aware of ESG related risks and opportunities. Further, thorough and complete disclosures improve communication between issuers and investors, allowing the latter to make better investment decisions and improve the efficiency of capital allocation.

Developing a mature ESG disclosure mentality takes time, it may take years or even decades. While this process is underway, each stakeholder group has a unique role to perform, so that the momentum is maintained and the quality of reporting improves.

CFA Institute recommends the following:

1. Government, Regulators and Stock Exchanges need to ensure meaningful, accurate, timely, and comprehensive disclosures, considering the characteristics of companies operating in different industries. They also need to keep current with global standards and developments, work toward harmonization, standardization and clearly articulate how disclosure regimes benefit issuers as well as offer guidance and training to smaller, less resourceful companies.
2. Issuers need to educate the board and senior executives to more fully integrate ESG and report on how it fits into the company’s strategic outlook, risk management framework, and corporate accountability to steer the company accordingly. They should ensure all relevant and material ESG information and related KPIs are communicated to the company’s stakeholders, including employees, investors, and other capital providers in a consistent and timely manner.
3. Asset Owners and Investment Managers should encourage investee companies to upgrade the quality and consistency of ESG information, including more details on what is material ESG information and how it may affect valuation and future corporate performance.

This report provides an overview of ESG disclosure regimes in seven Asia-Pacific markets: Australia, China, Hong Kong SAR, India, Japan, Singapore and Thailand. The report also includes the United Kingdom because of its global significance and advanced thinking/approach to ESG disclosure regimes.