The Asia-Pacific Regulatory Perspective – Publications

Environmental, social, and governance (ESG) investing is gaining traction across the Asia-Pacific region, but different jurisdictions and markets have varied approaches to disclosure requirements and regulations, creating a complex landscape for investors and companies. The key markets of China, Hong Kong, Japan, and Singapore have each seen important ESG regulatory and market developments in recent years.

Below we highlight some noteworthy updates for companies and investors.

MAINLAND CHINA

As is the case in Hong Kong, mainland China does not have specialized ESG laws, relying instead of scattered principles and industrial regulations. Regulatory targets are listed companies, banks and insurance companies, and key pollutant-discharge entities.

In an indication of China’s ESG progress, China’s three main exchanges separately published guidelines on 1 May 2024 for listed companies to disclose sustainability-related information. More than 300 companies, including those in key stock indexes, will be required to publish sustainability reports by 2026. The reports are to cover four core areas: governance, strategy, risk management, and metrics and targets. The reporting guidelines are expected to boost China’s transition to cleaner production processes by broadening the scope of ESG investments and driving investment into traditionally high-emitting sectors like steel and agriculture.

Additional Green Finance Developments

• The People’s Bank of China extended the implementation of a carbon-reduction tool to 2024 and included more foreign banks and local corporate banks.
• The nation’s green loan balance reached RMB 30.08 trillion (USD 4.256 trillion) at Q4 2023, marking a 36.5% year-on-year increase and constituting 12.7% of the total loan balance.
• China’s national carbon market traded 212 million tons in 2023, with annual transaction value growing to RMB 14.44 billion (USD $2.04 billion) from RMB 2.81 billion (USD 397.62 million) in 2022.

HONG KONG

While Hong Kong does not have a specialized ESG law, the government has been involved in positioning itself as a leader in green and sustainable finance. The city is currently one of the largest hubs for international green and sustainable bonds. Much of the regulatory effort has been centered around reporting by companies on the Hong Kong Stock Exchange (HKEX), where listed corporations must disclose ESG oversight, management approach, and strategy. Here the emphasis is on the board’s responsibility for effective governance and oversight of ESG matters.

Securities and Futures Commission (SFC) and Hong Kong Monetary Authority (HKMA)

There have been requirements introduced for fund managers of collective investment schemes in the SFC’s Fund Manager Code of Conduct to integrate climate-related risks into their investment and risk-management processes. SFC-authorized unit trusts and mutual funds are encouraged (but not mandated) to enhance disclosure requirements of ESG funds.

The HKMA, the equivalent of a central bank in Hong Kong, released a supervisory policy manual on climate-risk management encouraging scenario analysis and stress testing. The Financial Secretary also proposed in the 2024-25 Budget extending to 2027 the HKMA-administered Green and Sustainable Finance Grant Scheme introducing subsidies for green and sustainable bonds and loans.

Regulatory Developments to Watch

ESG Reporting Requirements:

• Enhancement of climate-related disclosures under the Environmental, Social and Governance Framework issued by HKEX in April is focused on ESG reporting for listed companies and adoption of International Sustainability Standards Board (ISSB) standards.

Proposed New Initiative:

• The Hong Kong Code of Conduct for ESG Ratings and Data Products Providers is aimed at enhancing the reliability and transparency of ESG ratings and data products.

Other notable developments include the Hong Kong Taxonomy for Sustainable Finance, which is a classification framework for green financial products, and the key initiatives unveiled by the Green and Sustainable Finance Cross-Agency Steering Group to support the development of transition finance to consolidate Hong Kong’s role as a leading sustainable finance hub.

JAPAN

While Japanese institutional investors have long been reluctant to make ESG investments, this attitude began to change around 2014 when the Japanese government adopted the Japan Stewardship Code (and the Japan Corporate Governance Code, adopted in 2015). Especially after Government Pension Investment Fund (one of the largest investors in the world) became a signatory of the United Nations Principles for Responsible Investment in 2015, the concept of “ESG” started getting a lot of attention and many institutional investors began to more seriously consider ESG investments. Between 2021 and 2024, many reports and guidelines have been published by relevant ministries, including Basic Guidelines on Climate Transition Finance, Sustainable Finance Report, Social Bond Guidelines, Code of Conducts for ESG Evaluation and Data Providers, Basic Policy for Realization of GX, and Guide on Financial Institutions Works Toward Net-Zero Emission. Major recent developments include:

Sustainability Information Disclosure in Annual Securities Report

From the fiscal year ending 31 March 2023, all listed companies have been required to disclose “Governance” and “Risk Management” information under a new section for “Sustainability Information” in annual securities reports. Each company should make its own judgement to disclose “Strategy” and “Metrics and Objectives” based on the materiality. Also, “Human Resource Development Policy” and “Internal Environmental Improvement Policy” and related indicators, as well as targets and achievements, should be disclosed. In addition, the “ratio of female managers”, “male childcare leave utilization rate”, and “wage gap between men and women” are required to be disclosed in the “Status of Employees”, and the “board’s activities status” should be disclosed in the Corporate Governance status.

“ESG Funds” in FSA Supervisory Guidelines

The Japan FSA in 2023 also amended supervisory guidelines aimed at preventing any misleading of investors. The guidelines define certain type of publicly offered investment trust as an ESG Fund where ESG is a major factor in selecting an investment and this information is described in the prospectus. Also, the guidelines provide several pointers for avoiding greenwashing (such as not using misleading labels), strategies which should be described, ESG-related targets, reference benchmarks, and ESG-related ongoing disclosure and delegation.

Basic Guidelines on Impact Investment

In March 2024, the FSA published basic guidelines on impact investment, which established a framework for impact investing in Japan. The Japanese government sees ESG as a potential avenue to address urgent social and environmental issues such as decarbonization and declining birth rates.

The guidelines are intended to foster a common understanding of basic concepts and principles expected for impact investment while ensuring that a wider range of efforts, creativity, and innovation are nurtured. The guidelines have four main principles: (1) Intention (clarify strategies and policies); (2) Contribution (consider the social or environmental impact and financial returns); (3) Identification, Measurement, and Management (measure and mange impact quantitatively or qualitatively); and (4) Innovation, Transformation, and Acceleration (identify and support the business’s characteristics and advantages).

Green Growth Strategy Through Achieving Carbon Neutrality in 2050

The Japanese government published the “Green Growth Strategy” in 2021 and identified 14 sectors that are expected to grow as we approach the year 2050. To date, 20 projects have been formed and over 2 trillion yen in support have been allocated to the world’s top-level technological development.

SINGAPORE

Singapore’s government has historically preferred more flexible, incentive-based measures for companies to achieve ESG goals. However, with a shift in the public’s attitude and accelerating international momentum around sustainability, Singapore has proactively implemented a more robust regulatory ESG framework intended to promote standardized ESG disclosures; encourage (and where necessary, mandate) responsible ESG practices; and cultivate credible, sustainable financial products and markets.

A noteworthy development was the creation by the Monetary Authority of Singapore (MAS) of the Green Finance Industry Task Force (GFIT) with the goal of establishing Singapore as the region’s premier financial hub for green and sustainable finance. Comprised of representatives from financial institutions, corporations, nongovernmental organizations, and financial industry associations, the GFIT created four key work streams:

1. Developing a taxonomy (the Singapore-Asia Taxonomy for Sustainable Finance).

The taxonomy sets out detailed thresholds and criteria for defining green and transition activities that contribute to climate-change mitigation across eight focus sectors and is the first taxonomy in the world to recognize the concept of transition, as in the journey towards net zero in the region it will be necessary to consider economic development, population growth, and rising energy demand.

The taxonomy will address five environmental objectives: climate-change mitigation, protection of healthy ecosystems and biodiversity, promotion of resource resilience and circular economy, and pollution prevention and control, with initial focus placed on climate-change mitigation. Transition activities are defined in the taxonomy through two new approaches:

• A “traffic light” system that defines green, transition, and ineligible activities across the focus sectors. “Green” denotes activities that are aligned to a 1.5-degrees Celsius outcome, while “amber” or “transition” refers to activities that do not currently meet the green thresholds but are on a path to net zero or contributing to net-zero outcomes.
• A “measures-based approach” that seeks to encourage capital investments into decarbonization measures or processes that will help reduce emissions and enable the emitting activities to meet the green criteria over time.

Disclosure-related regulations in Singapore are typically imposed on listed companies or companies with larger assets or revenues. From 2025, all listed companies must provide climate-related disclosures that are aligned with the ISSB standards. Large non-listed companies with an annual revenue of at least S$1 billion (US$0.74 billion) and total assets of at least S$500 million (US$372 million) have been given until 2027 to comply. However, international companies whose parents have already complied with ISSB-aligned standards or other equivalent standards may be exempt from reporting. This development marks Singapore as the first country in Asia that could likely mandate climate disclosure for non-listed companies.

The MAS also issued guidelines for disclosure and reporting in relation to retail ESG funds. To decrease the risk of greenwashing, these funds must explain how ESG significantly influences their investment decisions and not merely use negative screening. Simply incorporating or integrating ESG considerations into its investment process will not be sufficient. These funds must also invest at least two-thirds of their net asset value in accordance with such investment strategy.

This work stream identified and assessed the environmental risks and risk-transmission channels in the financial industry. Climate-related events and the risks associated with such events are subject to significant uncertainty in terms of their timing, frequency, and severity. As such, stress testing and scenario analysis are useful tools to assess the potential impact of climate risks on financial institutions. The GFIT shared best practices for scenario analysis and stress testing for banks, insurers, and asset managers so they can better understand and manage their environmental risk.

The GFIT developed a framework for green trade finance and working capital that provides a principles-based approach for lenders to assess what activities would qualify for green financing. The framework addresses the risks of greenwashing by also providing specific guidance on the recommended industry certifications for trade finance activities that qualify as green activities. Several leading banks in Singapore have piloted four green trade financing companies by applying this framework.

Other key developments

A recent development in the ESG space is the launching of the Singapore Sustainable Finance Association (SSFA) earlier this year. The SSFA builds on the successful work of the GFIT, whose term ended in April 2023. The SSFA includes members from non-financial sectors, academia, and other industry bodies and aims to foster collaborations between these different sectors.

In implementing ESG goals, many companies find it difficult to find historical and comparable ESG data. Consequently, it was also challenging for these companies to benchmark progress and to see the link between effective ESG integration and long-term investment performance. In response to this challenge, Project Gprnt (Greenprint) was launched to build a technology platform to streamline collection, access, and use of climate and sustainability data. This industry-wide initiative is undertaken by the MAS, together with leading banks like HSBC, KPMG, Mitsubishi UFJ Financial Group, and Microsoft. The project will onboard more partners and grow the platform regionally and globally.