ASIFMA (Asia Securities Industry and Financial Markets Association) and FOSDA (Future of Sustainable Data Alliance) released a final report of their year-long review of sustainability data challenges facing the industry in Asia-Pacific.
ESG investing in East Asia trails other regions globally with just 5% of AUM invested in sustainable projects, compared to 30% in North America; however, this is changing as institutions such as Japan’s Government Pension Investment Fund and MUFG Bank adopt wide-scale ESG criteria, and markets like China, Hong Kong and Singapore look to scale green and sustainable finance markets.
Future growth of ESG investment in Asia is inextricably linked to data – its availability, accessibility, reliability and comparability. When asked to nominate the greatest data challenge in ESG and sustainable finance, 56% of respondents to an ASIFMA/FOSDA poll earlier in the year reported ‘inconsistent data’. Significantly, there is no standardization to measurement of E, S, and G factors. Additionally, individual ESG metrics vary not only between industries and markets, but also between firms in the same industry, with the quality of company disclosures differing widely.
“Firms and investors are also navigating a confusing landscape of disclosure frameworks, incentive structures, data collection methods, and assessment in various markets and jurisdictions by both the public and private sectors,” said Matthew Chan, head of Policy and Regulatory Affairs at ASIFMA, in a statement.
“There is also no single binding global taxonomy, with classification systems for ‘green’ assets or products differing widely across jurisdictions and industries. The industry wants to see greater harmonization with a consistent principles-based approach that allows tailoring to each region’s specific conditions, including different levels of economic development, and which recognizes transitional activities and investments.”
In the same poll, a further 35% of respondents cited ‘poor quality data’ as the greatest data challenge in ESG and sustainable finance. There are many quality third party providers; however, reliance on a single data source can result in volatile indicators over time, and there are concerns regarding compatibility between vendors’ methodologies, as well as transparency regarding some methodologies. In some cases, there are concerns about quality of the data provided itself.
Technology and capability development
Technology offers part of the answer, but not all of it. A number of technologies and associated business models are evolving rapidly in this area, spanning AI, robotics, big data, blockchain, and the Internet of Things (IoT) amongst other solutions.
But when asked what is needed most to scale ESG and sustainable finance enabling technologies, nearly half of respondents to the ASIFMA/FOSDA poll prioritized ‘policy and regulation to support innovation’, indicating that market forces alone will not solve these data challenges, even where new technologies are part of the solution.
“With regard to sustainability, we’re really dealing with a complex, multi-dimensional issue and as ASIFMA has highlighted for some time, on sustainable finance, policies and industry efforts are needed to build capabilities across financial and other sectors in relation to scientific, operational, risk, reporting, governance, commercial and technological dimensions of ESG and sustainability,” said Chan, who himself qualified as an environmental engineer prior to moving into Financial Services.
Key recommendations
Based on the review of these issues, ASIFMA puts forward 8 key recommendations, which the industry argues is critical to enabling the development and scaling of sustainable finance:
1. A greater convergence towards a principles-based global (or at least regional) taxonomy
2. Higher, more consistent corporate disclosure standards between jurisdictions and sectors
3. Encouragement of higher standards of analysis, with incentives for more holistic and robust approaches to ESG measurement and analysis
4. Policy and regulation to support innovation and technologies that enable ESG and sustainable finance capabilities
5. A focus on education and skills to support ESG and sustainable finance capability
6. Higher standards and accountability for ESG ratings providers, potentially including regulation, and clear and harmonized requirements for product disclosure
7. Harmonization between ESG standards and frameworks such as UN SDGs (Sustainable Development Goals), and policy on climate change and bank supervision at systemic level, including on climate risk
8. Ongoing partnership and dialogue between the public and private sectors, as well as between stakeholders such companies and investors on disclosure and reporting standards