ESG Issues to Watch This Year

(photo credit: BondEvalue)

Going forward, it is expected that more regulators will require ESG disclosure from corporate and funds. Over the past year, we have seen a number of regulators update their disclosure requirements, generally there is a distinction between the disclosure of ESG information by listed companies and the disclosure by funds or fund managers.

The disclosure by funds or fund managers is intended to inform potential fund investors how the fund manager use EGS information in the investment decision-making framework say for instance, exposure to certain issues such as a portfolio’s carbon footprint, and climate change.

Disclosure by listed companies, on the other hand, encourages companies to collect relevant data and information to be better equipped to address ESG issues and provide information to stakeholders, investors of the risks and opportunities related to ESG, be it in short-or long-term.

To steer clear of “greenwashing” since there is a strong momentum is ESG fund flows, the scrutiny on ESG funds and fund managers would be tightened to ensure the integrity of ESG objectives.

Rise of Assurance – It is often cited that quality and availability of data as the main hindrance to ESG investing. Hence, it is foreseeable that the requirement on mandatory assurance on sustainability reports might entail. Reason being, assurance can contribute to the credibility, comprehensive and transparency of data and information. Our neighbouring country, Singapore requires internal assurance on sustainability reports while New Zealand and the EU have already adopted rules for  independent sustainability reporting assurance. Just like implementation of any new rule, it is a journey. Assurance requirement will start with voluntary and then progress to internal and independent assurance requirements. Do expect more regulators to shift to internal and independent assurance approaches in the coming years.

The confluence of sustainability reporting standards – Given the comparability of the ESG data is a concern for investors as there is a number of ESG reporting standards and frameworks across the markets, international organisations have been working on unifying the approach to the global standards. For example, the International Financial Reporting Standards (IFRS) Foundation aims to issue one final standard by 2022 following the formation of the International Sustainability Standards Board (ISSB) in 2021. With this, investors would be able to compare the sustainability performance of companies with a more similar set of metrics or indicators.

Of greenwashing, funds, and ratings –  The International  Organization of Securities Commissions (IOSCO) issued a set of recommendations for ESG Ratings and Data Product Providers last year, voicing out the increasing use of largely unregulated ESG products. The recommendations cover a wide range of factors related to ESG ratings including reliability of raw ESG data, transparency of methodology, potential conflict of interest and communications between rating providers and entities.

The Financial Conduct Authority (FCA) of UK has also expressed its concern over the relationship between greenwashing practices and ESG ratings and data. As stated in its Business Plan 2021/22, the FCA will collect and compile market opinion on regulating ESG rating providers in 2022. As voiced out by the users of ESG ratings and data products on the risks and challenges faced, it is highly inevitable that regulations on ESG products are on the horizon.

The UK Treasury released the Greening Finance: A Roadmap to Sustainable Investing in October last year, it is expected  that Green FInancce Strategy will provide a clearer pathway to align financial systems to the net zero transition going forward.

The acceleration of ESG development shall continue in 2022 , even though the developments might not be even across the board, when stakeholders want to jump into the bandwagon of sustainability. The ESG focal points shall extend into supply chain, migrant workers, labour rights, social diversity and biodiversity.  

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