General direction of travel for ESG in Asia this year seems to be one of increased regulation and scrutiny, despite ongoing geopolitical and economic headwinds globally. This will have a significant impact on how businesses in the region plan, operate, and report. Increased transparency and accountability, as well as ongoing concerns over greenwashing allegations and supply chain due diligence, are likely to rank high on Asia’s ESG agenda this year, and sustainable finance products will remain popular amongst lenders and investors active in the region.
Leading global law firm Linklaters has published the Asia edition of its ESG Legal Outlook 2023, which covers ESG trends it expects for the year ahead.
Please find the full report here, as well as key highlights below:
Net zero and energy transition
- New investors will enter Asia, including strategic developers seeking new opportunities away from their existing markets, and an upsurge in interest from financial sponsor clients, including specialist energy and infrastructure funds.
- Corporates and the financial sector will see pressure to follow through on their climate pledges, as there is a focus on ensuring that net zero targets and pledges made by businesses are translated into concrete and robust plans.
- More exchanges will build out infrastructure for carbon trading, and further developments in compliance and voluntary carbon markets in Asia is expected.
Greenwashing and litigation risks
- Tackling green claims (i.e. false or misleading statements that products or services meet certain environmental standards) continues to be a priority for regulators (particularly financial regulators) in Asia.
- In Hong Kong, the Securities and Futures Commission (“SFC”) has highlighted greenwashing as a key threat to the development of green and sustainable finance and is focused on mitigating this risk to position Hong Kong as a key sustainable finance hub.
- It remains to be seen whether the SFC’s approach will include new greenwashing-specific regulation, an ESG-enforcement taskforce, direct enforcement action, or a combination of these.
- While more regulation and guidance in this space is likely, regulators in Asia already have the tools to take action against companies that make misleading claims under existing laws addressing misrepresentation.
- Companies being required to disclose more sustainability related information in a world of imperfect information can lead to an increased risk of greenwashing allegations, and in turn, result in regulatory investigations or litigation, increasingly seen in the European market and Australia.
- Firms in Asia should continue to take steps to identify and mitigate potential greenwashing risks across their businesses. This includes developing a credible and consistent narrative around what greenwashing means in the context of their business, implementing robust internal procedures to monitor compliance and developing disclosures in line with emerging Asian and international standards
Sustainable finance
- Investor demand for sustainable funds remains strong in Asia this year – an increase in ESG-related fund disclosure is expected, given recently enacted regulations will result in greater investor, and wider market, scrutiny.
- ESG bond and loan markets will continue to grow throughout the year, as borrowers need to link their ongoing ESG commitments to real action, as will interest in sustainability-linked bonds and transition bonds.
- With the range and types of ESG-linked products continuing to widen, the market for ESG-related derivatives is also expected to grow in the coming year given its role in helping market participants hedge risk related to ESG factors.
Increased ESG regulation and disclosure requirements
- A focus in 2023 will be on the adoption and interoperability of the new International Sustainability Standards Board (“ISSB”) climate disclosure standards with local standards being developed.
- Although the ISSB standards are voluntary, the SFC is working with the Hong Kong Stock Exchange to develop a climate reporting framework for listed companies which will align with the global baseline being developed by the ISSB.
- Singapore’s regulators have also generally signalled support for the work of the ISSB.
- There is a shift towards mandatory climate-related disclosure regimes, with listed companies needing to ensure processes are in place to comply with requirements from regulators when they are implemented.
ESG in M&A
- There is a diversification of ESG assets coming to market in the Asia Pacific region. Whilst opportunities for investors in traditional targets in the ESG space remains strong – for example renewables, where valuations have remained robust in response to sustained interest – Linklaters anticipates that the acquisition of both service providers and technology companies focused on supporting the energy transition will become a more significant aspect of the regional M&A market.
- The expectations of lenders as to the scope of diligence undertaken by borrowers in leveraged deals is likely to become increasingly important in the context of tighter financing conditions this year.
If you are interested in further insights on key developments in the ESG space, or would like to speak with a lawyer from Linklaters, do feel free to reach out to us at linklaters@sandpipercomms.com.
For further information, please contact:
Denise Fung, Partner, Linklaters
denise.fung@linklaters.com
