Issuers of green bonds (i.e., bonds whose proceeds are allocated to eligible green projects) and sustainability-linked bonds (SLBs, i.e., bonds whose interest rates vary depending on the issuer’s ability to achieve pre-determined sustainability performance targets in respect of one of several key performance indicators) increasingly need to articulate a transition strategy (such as in accordance with the International Capital Market Association’s Climate Transition Finance Handbook). However, issuances of transition bonds (bonds issued on an issuer’s transition strategy) remain limited by comparison to other green, social, sustainable, and other labelled (GSS+) bonds, with issuers facing uncertainty as to the scope and extent of the transition required, thereby giving rise to concerns of greenwashing.
While these issues prevail in other countries, Japan has made strides in overcoming them, and transition bonds have become a key aspect of Japan’s capital markets. A group of Japanese government agencies published “Guidelines on Climate Transition Finance” in May 2021, and the country also recorded the completion of 12 “model” financings that year in “hard-to-abate” industries. The Japanese transition bond market has since grown rapidly, while the larger corporate bond market is shrinking. Japanese businesses have seen recent transition bond financing be significantly oversubscribed, with expectations for further large transition bond financing going forward in 2023. Investor appetite for these instruments is augmented by the Bank of Japan’s “Climate Response Financing Operations,” under which banks investing in Japanese transition bonds receive enhanced terms in their dealings with the Bank of Japan.
Like the US, the government of Japan has never issued a sovereign green bond. However, under the Green Transformation (GX) Law enacted in May 2023, Japan indicated plans to sell ¥20 trillion of “GX Transition Bonds” within FY 2023. While details are not yet final, the terms are expected to echo those Japanese corporate transition bonds and proceeds designed to promote industrial decarbonization plans. Japan would be the first sovereign issuer to choose the transition bond framework over green bonds or SLBs.
Transition finance and credible corporate transition plans have both been mentioned as valuable tools in the May 20, 2023 G7 Leaders’ Communiqué (albeit in a report on the Hiroshima G7 meeting). Further, relative success in Japan supports the concept that transition bonds could serve as a “more realistic” ESG finance tool for hard-to-abate issuers, and in markets that are heavily industrialized, energy- and resource-poor, or simply unwilling to operate under the other frameworks.
Singapore has seen significant traction in relation to sustainable finance, with the Monetary Authority of Singapore (MAS) progressing its comprehensive strategy to transform sustainable finance into one of the country’s defining features. These efforts started as early as 2017 when MAS convened an industry-led Green Finance Industry Taskforce (GFIT), followed by the launch of the Green Finance Action Plan in 2019.
Singapore has implemented a wide range of ESG-related regulation and policies, including a green taxonomy, green and sustainable finance grant scheme, green bond principles, ESG skills training subsidy, mandatory ESG disclosure requirement, and government sustainable debt issuance.
As Singapore looks to expand its regulatory regimes, the country’s notable recent developments include:
On July 6, 2023, the Accounting and Corporate Regulatory Authority (ACRA) and Singapore Exchange Regulation launched a public consultation on certain recommendations proposed by the Sustainability Reporting Advisory Committee. These recommendations propose that listed issuers should report International Sustainability Standards Board (ISSB) aligned climate-related disclosures from 2025, while large non-listed companies with annual revenue of at least SGD1 billion should do so from 2027. The public consultation will run until September 30, 2023.
These plans aim to maintain Singapore’s position as a global business hub and will contribute to the Singapore Green Plan 2030, the government’s sustainable transition strategy.
On June 28, 2023, GFIT, convened by MAS, released a fourth consultation paper seeking views on the thresholds and criteria for the early phase-out of coal-fired power plants under the Singapore-Asia Taxonomy, which is aimed at accelerating the development of green finance in Singapore. The decision to include coal phase-out in the Taxonomy resulted from extensive feedback during its third consultation, which ended in March 2023. Further, this decision comes after the second version of the Association of Southeast Asian Nations (ASEAN) taxonomy, updated in March 2023, which set out conditions under which coal phase-out can facilitate transition financing.
The GFIT has previously carried out three phases of consultations, and plans to publish the final Singapore-Asia Taxonomy (which will take into account feedback from all four public consultations) by the end of 2023, targeting a proposed implementation for early 2024.
The introduction of specific criteria for phasing out coal may accelerate financing opportunities, with MAS offering their support to banks and financial institutions participating in coal phase-out projects.
On June 8, 2023, MAS announced that it will set guidelines to steer financial institutions’ transition planning processes to facilitate, in turn, their clients’ credible decarbonization efforts. The guidelines will cover financial institutions’ governance frameworks and client engagement processes to manage climate-related financial risks and enable transition towards net zero. MAS intends to issue a consultation paper on the guidelines on credible transition planning later in 2023. For more information, please refer to this Latham blog post.
On June 28, 2023, MAS launched a public consultation proposing to elevate standards and disclosures of ESG ratings and data products in Singapore through a phased and proportionate regulatory approach, starting with a voluntary industry code of conduct (Code) for ESG rating and data product providers.
The proposed Code covers best practices on governance, management of conflicts of interest, and transparency of methodologies and data sources, including disclosure on how forward-looking elements are taken into account in the products. For example, the MAS aims to require disclosures on how transition risks and opportunities have been factored into ESG rating and data products. This disclosure is intended to allow users to better consider transition risks and opportunities when making decisions on capital allocation.
The Code defines ESG ratings and data products broadly by capturing products for which the ESG rating entails an opinion on ESG profile or characteristics of the rated entity, or for which the ESG data provided to market participants entails estimations, calculations, or analysis by the provider.
The MAS proposes to apply the Code to both:
(a) product providers based in Singapore and providing ESG ratings or data products that relate to activities and institutions in the securities and derivatives industry; and
(b) product providers based overseas but providing ESG ratings or data products that relate to activities and institutions in the securities and derivatives industry in Singapore.
Historically, the South Korean market has not been at the forefront of ESG regulatory developments. However, developments in the last few years have advanced the country’s ESG landscape. For example, the 2021 K-ESG Guidelines provide transparent and detailed criteria empowering companies to evaluate their own ESG performance, while a voluntary K-Taxonomy has been established to provide principles and standards on which economic activities are considered “green.”
As the integration of ESG factors into companies’ business operations develops, the following are examples of recently announced legislation and regulations:
1. New ESG ratings guidelines aim to enhance transparency
In January 2023, the Financial Supervisory Service (FSS) introduced new ESG Ratings Guidelines (Guidelines) to enhance the transparency and effectiveness of ESG assessment and certification. The FSS developed the Guidelines to remedy the lack of ESG legislation and low effectiveness of ESG ratings. The Guidelines reflect the International Organization of Securities Commission’s recommendations on “Environmental, Social and Governance (ESG) Ratings and Data Product Providers” from November 2021, and introduce measures to ensure transparency and greater efficacy, such as the:
The Guidelines became effective on February 1, 2023, and are implemented as a Korea Financial Investment Association best practice.
2. The Fair Trade Commission proposes updated guidelines to address greenwashing
In June 2023, the Korea Fair Trade Commission (KFTC) published a legislative notice on a proposed amendment to its “Guidelines for the Review of Environment-Related Labelling and Advertising” (Proposal). The Proposal is intended to address greenwashing through the adoption of amended principles for the assessment of environment-related labelling and advertising, which will include, among others, authenticity, clarity, specificity, and the consideration of a product’s entire life cycle. The Proposal also includes new examples of unfair environment-related labelling and advertising and more specific guidance regarding the assessment of the product’s entire life cycle.
On July 4, 2023, Executive Vice-President of the European Commission, Frans Timmermans, and First Vice Premier of the People’s Republic of China (PRC), Ding Xuexiang, held the fourth China-EU High-Level Dialogue on Environment and Climate (HECD) in Beijing, in an attempt to deepen cooperation on the global green transition.
A joint statement published by China and the EU at the vent of the event noted that “green is the distinctive color of EU-China cooperation,” a view reflected by the visit of Commission President Ursula von der Leyen to China earlier this year.
During the HECD, the parties discussed environment and climate priorities in terms of domestic implementation, as well as bilateral and multilateral cooperation. Both the EU and China outlined their frameworks for green growth, namely the European Green Deal and its legislation, as well as the Chinese 1+N policy framework. This framework outlines a comprehensive roadmap for peaking emissions across various sectors before 2030, consisting of overarching guidance (“1”) and action plans and policy measures (“N”).
The parties discussed further avenues for cooperation on climate mitigation, including methane, adaptation, the green energy transition and its socio-economic challenges, the circular economy, water, pollution and biodiversity, deforestation, and wildlife trafficking. In carrying out this cooperation, both sides proposed to coordinate at multiple levels and across governmental departments.
The EU and China agreed that domestic implementation efforts would need to be extended and amplified in order to effectively address the triple planetary crises of climate change, pollution, and biodiversity loss.
Historically, the EU and China have achieved some success in climate engagement. For example, in July 2021, China launched its national emissions trading system after nearly a decade of cooperation within EU-funded capacity building projects, while in November 2021 at COP26, the EU and China reached a common-ground taxonomy.
In another development, the Ministry of Ecology and Environment (MEE) of the PRC and the State Administration for Market Regulation (SMAR) jointly released the draft Measures for the Administration of Voluntary Emission Reduction Trading (for Trial) (New CCER Rules) for public comments for one month from July 7, 2023, to August 6, 2023. Upon its formal release, the New CCER Rules will become the basic governing rules for the relaunched Chinese certified emission reduction (CCER) credit scheme after a six-year hiatus.
Under the New CCER Rules, MEE and SMAR will jointly regulate and supervise the daily CCER market activities. The methodology for emission projects is subject to pre-approval by MEE. The trading of emission production units is limited to among “legal persons, other organizations or individuals that meets the relevant requirements of the State,” while regulations on cross-border trading are to be promulgated by the authorities at a later stage.
On April 14, 2023, the Hong Kong Exchanges and Clearing Limited (HKEX) published a consultation paper (Consultation Paper) seeking market feedback on proposals to enhance climate-related disclosures under the ESG disclosure framework. HKEX proposed to mandate all issuers to make climate-related disclosures in their ESG reports (i.e., an upgrade from the current “comply or explain” requirements), and introduce new climate-related disclosures aligned with the IFRS S2 Climate-related Disclosures Standards (ISSB Climate Standard). New climate-related disclosures will be introduced as a new Part D of the Environmental, Social and Governance Reporting Guide of the Listing Rules (to be renamed as “Environmental, Social and Governance Reporting Code” upon the effectiveness of these amendments) (ESG Code) and are broadly categorized into four core pillars, namely Governance, Strategy, Risk Management, and Metrics and Targets. The Consultation ended in July 2023. It is expected that the Consultation conclusion will be announced in the next few months.
Subject to such feedback, the revised Listing Rules and the ESG Code are proposed to come into effect on January 1, 2024 (Effective Date) and apply to ESG reports in respect of financial years commencing on or after the Effective Date.
HKEX recognized that certain disclosure requirements (e.g., Scope 3 emissions and current and anticipated financial effects of emissions) may require more time and work from companies in order to be in a position to be introduced as mandatory standards. Therefore, HKEX has provided interim provisions regarding these requirements for ESG reports covering the first two reporting years following the Effective Date (Interim Period). Accordingly, issuers are expected to be in full compliance with all new climate-related disclosure requirements in respect of financial years commencing on or after January 1, 2026.
Issuers and prospective issuers should be mindful of the new climate-related disclosure requirements and commence necessary preparatory work to ensure compliance once the new Listing Rules take effect. HKEX is expected to issue implementation guidance together with the consultation conclusions to set out principles, guidelines, and illustrative examples for the implementation of the new Listing Rules, refer issuers to external frameworks, tools, and guidelines helpful for disclosures, and set out a glossary of technical terms and acronyms commonly used in international ESG reporting frameworks, such as the ISSB Climate Standard.
Since HKEX published the Consultation Paper ahead of the finalization of the ISSB Climate Standard, it will continue to monitor developments and will likely take into account the final ISSB Climate Standard the ISSB published on June 26, 2023, together with market feedback, when finalizing the Listing Rule amendments.
The Hong Kong Monetary Authority (HKMA) published a discussion paper titled “Prototype of a Green Classification Framework for Hong Kong” (Discussion Paper) in May 2023, seeking market feedback on the adoption of a green classification framework (Framework) for use across Hong Kong’s financial sectors. The prototype for the Hong Kong taxonomy (Prototype) largely refers to the Common Ground Taxonomy, which was developed by the International Platform on Sustainable Finance, and also considered other frameworks, including the ASEAN Taxonomy and Climate Bonds Taxonomy. The Prototype is intended to align with the core principles of the Paris Agreement, to act as a proof against greenwashing, and to adopt science-based criteria and thresholds.
The proposed Hong Kong taxonomy will be developed in phases. The current phase aims to establish the Prototype for four initial sectors:
A total of 12 Prototype activities for these four sectors have been selected as a starting point.
In addition, the Prototype aims to provide three layers of “depth” in providing green definitions of varying extents of precision, considering the complexity of the Prototype activities and local circumstances. The three layers are:
The consultation ended in June 2023. The HKMA plans to fine-tune the Prototype and summarize the consultation with recommendations on the future work around Q3 2023.
In July 2023, the Securities and Exchange Board of India (SEBI) released new rules for ESG investment funds, which require at least 80% of assets to be invested in securities aligned with their specific strategies. In addition, asset managers must provide on a monthly basis both the Business Responsibility and Sustainability Report (BRSR) scores for their holdings and the name of the ESG rating provider.
According to SEBI, the measures are introduced to facilitate green financing and mitigate the risk of greenwashing.
Under the new guidelines, each ESG scheme launched by a mutual fund will need to invest at least 80% of assets into activities aligned with one of six themes which must be clearly stated in the fund’s name:
The remaining portion of the fund’s assets should “not be in contrast” to the other five themes, in a similar manner to the EU’s “Do No Significant Harm” principle.
The proposed rule resembles the US SEC’s Names Rule — which imposes that a sustainable fund must invest at least 80% of its assets in the investment the name suggests.
The above developments exemplify a number of key issues relating to ESG across the Asia-Pacific region, including decarbonization and climate change issues, sustainable finance opportunities, and development of ESG reporting frameworks to enhance transparency and align the region with global best practices. The region is a center of growth and urbanization, and plays a key role in the global supply chain. Notably, governments and regulators have started using targets, policy, and regulation in order to shape the markets and progress at the pace and scale needed to secure the sustainable future of the region.
We expect developments across the region in particular in relation to disclosures, following the release of the “global baseline” ISSB standards. Singapore is already consulting on the use of the standards, and Japan has announced that it will issue draft sustainability disclosure standards based on the ISSB standards by March 31, 2024.