Asia is unique in being part of the problem but also the solution, according to professor Lawrence Loh, director at the Centre for Governance and Sustainability at the National University of Singapore’s Business School.

Here he talks to ESG Clarity Asia about regulation in the region, why ‘ESG’ needs redefining and what investors can be looking out for when it comes to sustainability progress.

How has the ESG reporting structure in Asia evolved over the years and how does it compare with the rest of the world?

Everything is now integrated into ESG, but I believe it should be EESG, with the first E representing the economy. There should be balance with a calibration for the economy and ESG should not be seen in isolation.

When we look across the world, we see that in the EU, the pendulum has swung to very intensive regulation. Just this year, the EU sustainability reporting standards together with the directive from previous non-financial has come out and beyond that, for many years, they have a cap-and-trade mechanism for carbon emission for their large companies.

And right now, they are trying do something on conservation through cross-border adjustment; they do not want European companies to choose the path of least resistance of outsourcing sustainably towards Asia. If you import from Asia in less sustainable places, they are cheaper at the border so that they don’t exploit the Asian loophole.

It is hard to crack the EU market, unless companies are really sustainable. This is how Asia should be – if you’re really interested in your market, you have to get into the game, fast.

Then you look at the US, where there has been an ideological tension for many years. In sustainability, because of that fundamental problem of externality, what you regulate is what you get.

What role does greenwashing play in the development of regulation?

Greenwashing is something we need to deal with. The hottest news now is net-zero clarification and it seems almost fashionable for everyone to jump on the bandwagon. We have to look more critically at net zero – the transition is more important than the destination.  

Stakeholders, as well as investors, must know that net zero will not drop from the sky 27 years from now, there’s no action plan. So, you need to make the whole journey of interim intermediate action, commitment, verification. To reach net zero, the most important part is really for companies to do deep decarbonisation, to radically move their energy portfolio, manage their waste, and manage their water as part of the whole value chain.

What is investors’ perception towards sustainability?

Investors are only one part of the equation, but they are the most critical part of it for most businesses. We need certain mechanisms that will exogenously affect their financial burden, so that the investor will see the need to be sustainable, because investors will always want high returns and low risk. What is happening now is the risk curve for non-sustainable companies has shifted upwards because of transition risks.

Th new investor needs to be more aware, to adopt a set of expectations on sustainability, beyond just short-term monetary gains.

What opportunities do you see in the sustainability space in Asia?

In reality, as much as the problem is in Asia, the solution is also in the region. We are differentiated among countries’ jurisdictions, for example in nature reporting and the attention to biodiversity paid by companies in Australia and Japan, which is strong compared to other regions.

Asset managers and financial institutions should now watch out for two regulatory changes – Scope 3 and the International Sustainability Standards Board (ISSB). Scope 3 looks at emissions, in particular those across the supply chain, public sector bodies can prioritise decarbonisation efforts. Meanwhile the ISSB, which comes under the Institute for Financial Reporting Standards, ensures that corporates will now have to take full responsibility for all their actions.