Corporates and investors are facing twin developments that are hitting them from opposite directions when it comes to sustainability.
On one hand, the release and rapid endorsement of the new International Sustainability Standards Board (ISSB) climate-related disclosure standards, which were finalized in June and developed to serve as a comprehensive global baseline for the capital markets, is expected to result in more consistent and higher-quality information.
This means that corporates and investors will likely see increased disclosure on Scope 1 (direct) and Scope 2 (indirect) greenhouse gas (GHG) emissions by investee companies as they speed up compliance with the ISSB disclosure standards. For corporates, this also means increased costs for compliance to the more disclosure rules.
On the other hand, rising regulatory requirements (from the ISSB standards) are prompting regulatory and compliance fatigue among corporates and investors.
This was the conclusion made by Sustainable Fitch, the environmental, social and governance (ESG) ratings unit of the Fitch Group, in its ESG Trends report for the second quarter of 2023.
A lot of progress has been made in 2Q 2023, according to the report, which notes that:
- The level and quality of corporate climate-related and sustainability disclosures will increase as the ISSB standards are adopted rapidly.
- A high number of taxonomies and other regulatory initiatives at various stages of development indicate more to come, though regulatory fatigue is becoming more pronounced.
- Sovereign-labelled bond issuance kept the market afloat over 1H 2023, a trend that is expected to continue, with deep retrenchment in Asia-Pacific and US corporates due to higher interest rates.
On the ISSB standards, these factors will likely affect the underlying metrics that contribute to towards Sustainable Fitch’s ESG ratings assessment.
The ISSB standards are focused on the information needs of investors, while the Global Reporting Initiative, an international independent standards organization, seeks to meet the broader information needs of other stakeholders.
“Already, 70% of our rated entities have some disclosure of Scope 1 and 2 GHG emissions,” the report states. “This percentage will increase as more entities move to new standards that make reporting on GHG emissions by scope mandatory.”
On the taxonomies, Sustainable Fitch laments the current proliferation of various ESG taxonomies, but is optimistic that at a certain point there will be some consolidation towards a more unified agreement on the subject.
“There are persistent concerns about the interoperability of an ever-greater number of taxonomies introduced," the report finds. “While we expect the market to eventually coalesce around a handful of benchmark taxonomies, it is unclear which ones they will be and which characteristics will dominate. Elements that are facilitating transition financing are emerging as key characteristics in new taxonomies in Asia.”
In Asia alone, taxonomies for sustainable finance have been created in mainland China, South Korea, Japan, Mongolia, Indonesia, Malaysia and other countries in the Association of Southeast Asian Nations region. Australia, Singapore, Hong Kong, Thailand and New Zealand are also in various stages of developing their own.
On regulatory and compliance fatigue by both corporates and investors, Fitch Ratings admits that this partly stems from the desire by regulators and market participants to stimulate sustainable finance and mitigate greenwashing, which in turn has resulted in the proliferation of regulatory proposals.
“Increasing regulatory requirements are also prompting a rising level of regulatory and compliance fatigue among corporates and investors based on our observations,” Sustainable Fitch notes.
On the bright side, sustainable debt issuance by emerging market (EM) sovereigns has kept up pace in 2Q 2023, a continuation of the 1Q trend. Notable issuances came from EMs like Chile, Indonesia, Mexico, Peru and Turkey. Total sovereign-labelled debt issuance almost doubled in 1H 2023 to US$92 billion, from US$48 billion in 1H 2022, according to data by Environmental Finance cited in the report. And issuance in the US and Asia-Pacific contracted in 1H 2023 from a year earlier.
The report point outs: “Indications from markets and governments are that momentum in [sustainable debt] sovereign-labelled issuance will be maintained for the rest of the year.”