Companies face increased pressure to explain their environmental impact. Different parties across the financial system are working to develop systematic and standardised methods to capture this data.
Informed financial decisions require data. Sustainable finance is no different, as corporates are under increasing pressure to provide information to investors about how they are managing the risks associated with climate change.
Disclosure of green information however is still an evolving area, with many different voluntary standards at varying levels of development. But once the necessary information becomes more widely available in a standardised manner, disclosure could prove to be a factor that directs capital towards sustainability projects.
Acquiring and analysing information
“The investor community is aware that there are issues relating to sustainability, but there is not always the information that is needed to make judgements,” said Stewart James, Managing Director, Group Public Affairs, Asia-Pacific, HSBC. “There has therefore been an increased focus on disclosure so that all the various actors in the financial system can understand the issues relating to sustainability better.”
Disclosure can take many forms. A company in a carbon-intensive industry for example, might be expected to explain how it is managing its environmental impact and creating a role for itself in a more sustainable economy. The issuers of green bonds have to demonstrate that the capital raised by the instrument funds a sustainable project and make ongoing reports to show that the project is meeting its environmental goals.
Over the last decade, the quantity of data available that is related to sustainability has increased significantly. But there has not been a similar improvement in the quality of information, said Sarah Percy-Dove, Managing Director and Head of Asia Pacific Fixed Income Research at BlackRock. Asset management companies, she said, often lack the expertise to analyse the metrics available to them and are therefore reliant on third-party providers for assistance.
“The evolution of information is certainly starting to gain more substance, but in terms of taking it all in, digesting it, and turning it into a clear risk assessment, I think there is still a lot of work that needs to be done,” she said.
Some individual countries have set standards, but without uniformity across markets, there can be significant differences from place to place. What might be classified as a green bond in one market, might not meet the standard in another. Not only does this increase the difficulties that investors face when they try to analyse information across markets, it can also make it hard for corporates to meet criteria that can be different in multiple jurisdictions.
As the Chief Sustainability Officer of City Developments, Esther An is responsible for making sure that the Singaporean real estate company discloses environmental information. As a listed company, this means meeting the requirements of multiple index providers in order to be part of their sustainable indices. The process can be time consuming, and it needs to be done without losing sight of the fact that the company has to return a profit to its shareholders.
Standardisation is key: “There are increasing standards and metrics on ESG reporting. It will help both corporate reporters and investors if efforts can be put in to harmonise the various standards into a global reporting framework,” said Ms. An.There is one ongoing project to bring more uniformity to sustainable disclosure. In 2015, the Financial Stability Board (FSB) launched the Task Force on Climate-related Financial Disclosure (TCFD), which has already published recommendations on how to structure consistent disclosures that are applicable in multiple industries and countries.
“A lot of top global corporates have already signed up for TCFD recommendations, including a number from Singapore, and this is helping to improve the information investors have available on ESG risk and allowing them to take this into account in their investment decisions,” said Sean Henderson, Co-Head of Debt Capital Markets, Asia-Pacific, HSBC. “These developments might be more advanced in Europe and US, but they are coming to Asia.”
TCFD does not impose mandatory disclosure requirements on companies, and it is unlikely to become law in the near future, said HSBC’s Mr. James. “We are learning by doing, and if you introduce detailed legislation to create disclosure requirements, you would probably have to legislate again in the future. Instead, you might get a framework legislation that makes disclosure mandatory, but allows for the details to be decided by industry.”