Asian securities regulators led by the Securities and Futures Commission (SFC) of Hong Kong recognize that climate change is an issue that transcends geographic boundaries and they are working to address regulatory issues pertaining to the lack of common sustainability standards and greenwashing.
“Because there are multiple and diverse sustainability standards and frameworks, investors are not able to get consistent and comparable disclosure to enable them to make informed investment decisions,” says Christine Kung, the head of sustainable finance at the SFC. “Another challenge that we face is greenwashing. But the good news is that regulators are working together to address these challenges, especially given that climate change is a borderless issue, and one that no single party is able to address on its own.”
The SFC has been appointed vice-chair of the recently created sustainable finance taskforce established by the International Organization for Securities Commissions (IOSCO), the global industry body of securities regulators around the world. The IOSCO taskforce, which has 22 members, has also established a sustainable working group for the Asia-Pacific that is also led by the SFC.
“As securities regulators, our aim is to provide investors with decision-useful information so that investors are able to price assets more accurately and can make informed investment decisions,” Kung notes.
The IOSCO sustainable finance taskforce has met several times since the summer with the objective of harmonizing various environmental, social, and governance (ESG) standards and taxonomies from a regulatory perspective.
Some progress has already been achieved, particularly with the publication by IOSCO’s central bank network of regulatory guides, including one on climate scenario analysis, and another for supervisors seeking to integrating climate-related environmental risks into any potential regulation.
Kung points out: “We have also seen major strides made by voluntary standard organizations, which fall outside more formal regulation, with, for example, the United Nations’ Principles of Responsible Investment making TCFD [taskforce on climate-related disclosure] reporting mandatory.”
In this connection, five international industry bodies – the Carbon Disclosure Project, the Climate Disclosure Standards Board, the Global Reporting Initiative, the International Integrated Reporting Council, and the Sustainability Accounting Standards Board – have issued a joint statement expressing their intent to work together towards comprehensive corporate reporting.
It has become clear to regulators, Kung shares, that the basic policy framework for sustainable finance comprises four major elements – the disclosure by companies of physical and transition risks arising from climate change; product-level disclosure and labelling; asset manager disclosures and the integration of ESG or climate change factors at both the entity and fund levels; and the incorporation by banks and insurance companies of climate-related risk into their risk management framework and the disclosure thereof.
The challenges facing regulators when they try to incorporate sustainable finance within the conventional regulatory frameworks include the current lack of harmonization of standards and the practice of mis-labelling non-sustainable investment activities as part of sustainable finance.
“The proliferation of standards and framework simply leads to confusion,” Kung says. “Also, there are no common definitions or taxonomies. So, we see taxonomies operating outside of most regulatory systems, and not normally consistent.”
“Another challenge that we face is greenwashing,” she adds. “For example, there is the use or misuse of incompatible ESG ratings or scores, or misuse of labelling. All these are particularly bad when the mandate of securities regulators includes investor protection.”