Sustainable Rules and Sustainable Opportunities
Head of ESG Kathlyn Collins explains how the tsunami of ESG-related regulations across the investment world is a challenge that will potentially yield opportunities for emerging markets investors.
How is the increase in global sustainability regulations and ESG legislation helping the growth of responsible investing?
I don’t think more environmental, social and governance (ESG)-related regulations are necessarily helping the growth of sustainable investing but rather it is setting the stage and leveling the playing field for terminology, metrics and transparency.
Is legislation and regulation around ESG moving at different speeds across different markets? Why do you think these differences exist?
Yes, I think that is the case. Europe, for example, has been moving much more quickly than other markets. The EU’s Sustainable Finance Disclosure Regulation (SFDR) is the most far reaching and comprehensive set of sustainability-related financial rules in the world and has been a reference point for Hong Kong’s Securities and Futures Commission’s (SFC) climate considerations for asset managers.
Which regions do you consider to be the most advanced in terms of sustainable investing regulation?
The most robust regulation is the EU’s SFDR. It’s designed to help investors understand, compare and monitor the sustainability characteristics of investment funds by standardizing disclosures and directing capital flows to sustainable finance activities, such as green businesses. The SFDR and the EU Taxonomy, a classification system establishing a list of environmentally-sustainable economic activities, are changing the landscape for market participants in Europe.
These rules have been closely watched by regulators in other markets who are formulating their own ESG-related disclosure policies. For example, Hong Kong’s SFC has proposed enhanced disclosure requirements around climate risk in investment products. In India, the Securities and Exchange Board (SEBI) now requires the top 1,000 listed companies by market capitalization to submit an annual Business Responsibility and Sustainability Report (BRSR) and ESG-labeled funds have to invest at least 80% of assets in ESG-themed securities and disclose measures taken to mitigate greenwashing risks. In Singapore, regulators developed new disclosure standards for ESG retail funds earlier this year.
ESG taxonomies, which serve as the bedrock of many sustainable finance regulations, have also been emerging throughout Asia and in emerging markets in other parts of the world including Mexico and Chile.
What about China? How are sustainability regulations progressing there?
China saw a great deal of regulatory change in 2021, from environmental policies such as the launch of the highly-anticipated Emissions Trading Scheme (ETS) to regulations aimed at broader common prosperity goals. Encouragingly, more A-Share-listed companies are starting to disclose ESG information. In 2021, the China Securities Regulatory Commission (CSRC) published the final set of ESG-related amendments to the disclosure rules applicable to annual reports and half-year reports. These amendments require all listed companies to disclose any penalties relating to environmental issues over the period.
This year, both the Shanghai and Shenzhen Stock Exchanges revised the Listing Rules to raise the bar on information disclosure around ESG matters. Now all issuers are required to publish a Corporate Social Responsibility (CSR) or ESG report and identify the standard they used to make the disclosure. Issuers are expected to make timely disclosures around significant environmental and social incidents and when administrative punishments are imposed on their major shareholders, key controllers, directors, supervisors and senior managers for illegal activities or breach of fiduciary duties. In addition, China has issued ESG disclosure standards for all central state-owned enterprises (SOEs).
Are China’s sustainability rules related to the environment gaining traction?
China’s government has pledged to be carbon neutral by 2060. The country has been moving at a fast pace to reverse environmental damage, much of which was brought on by its huge growth over the last decade. In the last few years there’ve been a substantial number of ‘E’ policies, such as ETS plans, low-carbon financing programs and environmental disclosure regulation. A lot of this, however, would not have been possible without the governance and policy changes that China made in conjunction with the opening of its capital markets.
How has Matthews absorbed the regulatory tsunami? What difficulties have you encountered and what opportunities has it provided?
Consistency in data and its application across jurisdictions remains a challenge, as is collecting sustainability information in jurisdictions where corporations aren’t required to report it. For example, obtaining data from investee companies on unadjusted gender wage gaps is tough but it is a mandatory indicator under the EU’s SFDR.
Reliance on third-party data providers is another hurdle. For example, we engaged with a specialty steel toolmaker in China. While it was a relatively high carbon emitter it was assessed by a third-party on modelled emissions based on the average for traditional steelmakers rather than its own reported data. Its production process is shorter than that of traditional steelmakers and in addition the company has replaced coal with natural gas for its boilers and reheating furnaces. While the third party noted the company’s emissions are lower than traditional steelmakers it still took time for this to get reflected in data feeds and assessments. Consistent sustainability disclosure standards is an issue that is a huge opportunity for the International Sustainability Standards Board (ISSB) to address.
Looking at a few trends, there is the integration of ESG criteria, the creation of specific products and the adaptation of funds to new legislative criteria. How has Matthews responded?
We’ve seen a structural shift in investor priorities in recent years, with sustainability and outcome-based objectives becoming an important factor in the investment decision-making process. We are committed to providing sustainable investment solutions to clients and continuing our history of being responsible stewards of investor capital.
We recently launched the Asia Sustainable Future Fund, our first Article 9 UCITS strategy under SFDR. The Fund qualifies for stringent Article 9 status by seeking to generate long-term capital appreciation by investing in companies that contribute to a sustainable future and are addressing global environment and social challenges while following good governance principals. Companies are evaluated through a sustainable investment framework, with a focus on their contribution to, or potential future contribution to, positive social and environmental outcomes.
Additionally, five of our UCITS funds are categorized as Article 8 funds under SFDR regulations. This means they integrate ESG considerations by investing in companies that follow good governance practices and have positive environmental and social attributes among other characteristics.