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Global convergence in ESG – what next for regulation?

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David Hetling, Global Marketing Director for Regulated Industries at SDL, discusses regulation int he context of continued focus and efforts on ESG investing.

For some years now, we have been witnessing the very steady growth of interest and, more to the point, investment in ESG products across the funds landscape. Once again, FundForum Asia is reflecting this theme strongly in its 2021 agenda – there is no sign of a slowdown on this topic and nor should there be.

ESG: mainstream, and not just in a finance context

I am sure that I am joined by the majority of global citizens in applauding the attention given to critical existential issues like climate change, air and marine pollution, loss of biodiversity and the plundering of natural resources as well as equally vital human concerns over diversity and inclusion, worker exploitation and corporate ethics.

Better still, the very concept of ESG is now reaching the mainstream – it is no longer a concept talked about solely in the finance industry but is now evident in the public narrative. Nowhere is this better demonstrated than in a number of Asian territories where ESG is now a principal driver in investment decisions, particularly among younger investors.

As ESG has become part of the mainstream though, calls for transparency in the decision-making behind ESG fund management have grown alongside the desire for detailed disclosure about the specific constituents of funds, their corporate missions and their activities – and regulators have had to act in response to this.

Where regulation currently stands

The EU has delivered the most far-reaching regulation to date with the Taxonomy Regulation and its requirement for specific detail under the Sustainable Finance Disclosure Regulation (SFDR). Like most regulation, this one is not without its critics but it is fair to say that the goals of the framework – to prevent greenwashing – are widely appreciated by both the industry and the investors it serves.

What is interesting though is that the SFDR now appears to be galvanizing other jurisdictions into action. China is currently working with the EU to harmonise taxonomies for environmental investing with a joint classification expected by the end of this year, delivered by the People’s Bank of China. This issue is gathering momentum in Japan too with mandatory disclosures now under discussion. South Korea’s Financial Services Commission is supporting regulation in this area with plans for mandatory labelling of ESG funds.

The Monetary Authority of Singapore has released its Guidelines on Environmental Risk Management for Asset Managers which include the need to disclose where there might be a risk to investment returns from environmental considerations.

Hong Kong’s Securities and Futures Commission has an existing set of guidelines on how firms market and execute their ESG strategies while Taiwan is set to follow suit this summer with tighter rules from the Financial Supervisory Commission on ESG fund launches.

And of course, the US is back in the game under the Biden administration with a public consultation by the Securities and Exchange Commission on new rules around climate disclosure at the same times as reviewing its 2010 guidance on this subject with a view to developing a more comprehensive framework.

Work to be done

This is not to imply that considerable work is not still required – it is. Troubling gaps exist in availability and consistency of data on which reporting is based, divergence over both analysis and scoring and even doubts over alignment between regions, with concerns that cultural applications of ESG may not be appropriate across all territories.

Nevertheless, the global process has unstoppable momentum behind it now and the coming years will bring progressive growth in availability of data, enhancement of analytics on which to base decision-making and, ultimately, a degree of synchronization between global regulations to the benefit of firms and investors.

SDL watches this area with great interest. In our work as a language services provider to the vast majority of asset managers globally, we specialize in staying ahead of developments in all areas of regulation as they affect the industry.

David Hetling will be speaking at Fundforum Asia Virtual, April 20-21, 2021. 

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