In 2023, the ESG priority for global institutional investors will continue to be climate change and environmental protection. The new factor, however, is that AGM proposals seeking disclosures on carbon emissions are likely to reach companies in new markets in Asia for the first time.
While ESG has been in development for years, there is now a notable escalation in how it is treated. A major factor is institutional investors are adopting more activist-type behaviour rather than passive stewardship. In a significant move from the end of April this year, the MSCI will remove or downgrade ESG ratings on hundreds of funds. Unlike individual regulators, global funds and indices like the MSCI can drive behaviour across multiple markets. It is common that these global institutional investors will proactively question a company’s ESG and environmental disclosures.
To date in Asia, individual company’s ESG policy have largely been directed at local regulatory compliance regimes rather than investors or other stakeholders. In many cases this will not be sufficient to satisfy global funds who require more detailed information on disclosure, performance and engagement.
This is in part because these funds themselves are now assessed on how they drive returns and material emission reduction through active stewardship and not just from avoiding bad ESG risk.
To match these expectations, Asian companies will need to upgrade emissions reporting and integrate climate change as an integral part of their business strategy: that means looking at not just the costs but the opportunities in terms of value creation and better relations with different stakeholders.
Throughout Asia we are already seeing better standardization of disclosure frameworks which quantify and report on climate- related risk. To date, GRI Framework has generally been most widely used along with United Nations Sustainable Development Goals (SDG).
In just the past month both Hong Kong’s Stock Exchange and Singapore’s Monetary Authority announced that they intend to align with rules being developed by the International Sustainability Standards Board (ISSB). Hong Kong’s new rules give a preview of potentially onerous reporting ahead: companies need to disclose details of transition plans, measure and disclose Scope 3 emissions with the mandate to be fully compliant by 2026.
In China regulators are considering mandatory ESG disclosures with focus on state-owned companies, as well as consideration of versions of ISSB standards. The Securities and Exchange Board of India is actively moving forward with enhanced climate compliance and has mandated that the top 1,000 companies make ESG disclosures on a voluntary basis in 2022. That is now mandatory for 2023.
What ISS Research and Glass Lewis are recommending
Companies will find this new ESG landscape is being reflected by proxy advisors. This year proxy advisors ISS Research and Glass Lewis extended their climate accountability analysis to the region. It brings the prospect of climate-driven voting overrides on what had traditionally been Governance-based AGM Proposals.
In its latest advisory update ISS extends its climate policy to the full global universe of companies, including those in Asia in 2023. This calls for voting against non compliant companies that are significant greenhouse gas emitters, while also requiring climate risk information to be disclosed in line with the Task Force on Climate-related Financial Disclosures. This entails comprehensive reporting across governance, strategy, risk management metrics and targets including either medium-term GHG emission reductions targets or net zero by 2050 for Scope 1 and Scope 2.
2023 as the year when ESG arrives as a key risk issue for the Boardroom
In past years, ESG disclosure was too often made with good intentions, though broad and vague, and frequently containing a marketing twist. Such language today may signal ESG weakness and attract the unwanted attention of activist investors while stunting interest from desired institutional shareholders.
This new ESG reality facing company Boards has not occurred in isolation but comes amid a flurry of initiatives from regulators, index compilers, activists and global institutional shareholders across multiple jurisdictions. The end result is clear – a potentially onerous compliance landscape, which in turn will keep the pressure on proxy voting advice around ESG.
