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By Umakanth Varottil. Given the dominance of the controlling shareholders, institutional shareholders lack the wherewithal to influence managements on ESG matters in the same way they might be capable of doing in dispersed shareholding settings.

Environmental, social, and governance (ESG) factors have become a force to reckon with for corporations around the world. They constitute an integral part of investment decision-making, particularly for institutional investors. Such trends have been buoyed further by the emergence of concepts such as ESG stewardship and ESG activism, which have stirred investors to engage closely on environmental and social matters. Consumers too tend to pay considerable attention to the ESG attitudes of companies whose products or services they utilize. A market-oriented approach, which involves pressures imposed by corporate actors such as investors and consumers, has constituted the mainstay of the initial movement towards the recognition of ESG factors in corporate decision-making.

The evolution of ESG in the Asian context suggests an altogether different approach:  governments constitute the primary motivator in spearheading the ESG movement. The focus of ESG has been via regulation rather than through the capital markets. This is altogether understandable.

At the outset, there are limitations on the extent to which institutional investors can influence corporate boards on matters of ESG. In most Asian jurisdictions, the corporate sector is populated either by family-owned companies or state-owned enterprises. Given the dominance of the controlling shareholders, institutional shareholders lack the wherewithal to influence managements on ESG matters in the same way they might be capable of doing in dispersed shareholding settings. For instance, there is scant incidence of shareholder activism more generally in Asian markets, and much less success, and limited only recently to a few markets such as Japan and Korea.

Moreover, developments in governance of companies tend to be impelled in Asian jurisdictions through corporate regulation rather than by way of market impetus. Hence, considerable emphasis is placed on governments steering the course of corporate governance norms, with limited reliance on ‘soft law’ or forms of self-regulation. Developments in ESG in the Asian markets are consistent with these corporate regulatory trends.

To be sure, a regulatory-focused approach towards ESG is not restricted to Asia. The related developments in the European Union are suggestive of exhaustive regulatory oversight on aspects of ESG, leading scholars to term this phenomenon the ‘hardening of ESG’. The difference in Asia, though, is the relative heterogeneity of approaches adopted by governments towards ESG. This is best demonstrated through the norms pertaining to disclosures on matters of ESG and, in particular, climate change. Through these, environmental and social risks are considered crucial to investors to the extent they bear a direct impact on the financial performance of a company.

While it would be a daunting task to analyse the developments in all Asian economies on this point, the examples of India, Singapore, and Hong Kong, whose legal systems are embedded in common law, might provide a flavour for the trends in the region. The sample encompasses the fifth largest economy in the world in the form of India and the two key financial centes in Asia, being Singapore and Hong Kong.

India has been at the forefront among Asian economies to introduce sustainability reporting since more than a decade ago. In 2012, its securities markets regulator, the Securities and Exchange Board of India (SEBI) made it mandatory for the top 100 listed companies (based on market capitalization) to include a business responsibility report (BRR) as part of their annual report. Since then, not only has the universe of reporting companies expanded to the top 1,000 listed companies, but the scope of reporting obligations has been enhanced with effect from the financial year 2022-2023 in the form of the business responsibility and sustainability report (BRSR). More recently, in July 2023, certain core aspects of the BRSR have also been made applicable to value chains of a company (both upstream and downstream) with a need for limited assurance of such disclosures. By providing a uniform regime for dissemination of ESG data in an acceptable form, the BRSR has brought about an overall enhancement in the incidence and quality of reporting among Indian companies.

However, some challenges remain. The BRSR efforts do not, as yet, appear to benchmark against well-known global standards such as the recommendations of the Taskforce on Climate-Related Financial Disclosures (TCFD) on financial risk disclosure of climate-related aspects of a company’s business. Moreover, commentators have argued that the BRSR still lacks comprehensiveness in comparison with international standards, which would enable companies to make do with boilerplate disclosures and also magnify the possibilities for ‘green washing’. These factors make the comparability of disclosures of Indian companies across their global peers more daunting.

Unlike India, the two financial centres of Singapore and Hong Kong had followed a predominantly shareholder-oriented approach and undertook a specific focus on ESG only more recently. For example, the Singapore Exchange (SGX) introduced sustainability reporting requirements in 2016, requiring companies to disclose their practice on material ESG factors. The Hong Kong Exchange (HKEX) also requires companies to report on ESG matters at two levels, which involve certain mandatory disclosure requirements and other ‘comply-or-explain’ provisions. However, despite being late entrants to the ESG bandwagon, both Singapore and Hong Kong have strengthened their reporting obligations significantly within a short span of time. Pertinently, both jurisdictions require companies listed on their exchanges to progressively adhere to TCFD norms, which introduce a great deal of standardization with respect to climate reporting, and presumably help overcome some of the challenges faced in the Indian context.

In all, judging by the developments in the three sample Asian jurisdictions of India, Singapore, and Hong Kong, there is excessive reliance on governments rather than the markets to keep the momentum on ESG. While the markets (represented by actors such as investors and consumers) have some role to play, their influence is likely diminished in Asia compared to Anglo-American jurisdictions.


By Umakanth Varottil, Associate Professor of Law at the National University of Singapore and ECGI Research Member.

If you would like to read further articles in the 'Corporate Governance in Asia Special Issue' series, click here

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This article features in the ECGI blog collection Corporate Governance in Asia

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