Tracking ESG in Asia - May 2023

Given the speed of ESG developments across the Asia-Pacific region, Herbert Smith Freehills presents a snapshot and tracker of key updates. 

This is the May 2023 edition of our tracker on ESG developments across Asia.  Click on each of the jurisdictions for the relevant updates; this table sets out an overview.

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MAINLAND CHINA

Shenzhen Stock Exchange revised its guidance on ESG information disclosure

On 10 Feburary 2023, Shenzhen Stock Exchange issued revised Guidance No. 3 for the Self-Monitoring of Shenzhen Stock Exchange Listed Companies –Industrial Information Disclosure and Guidance No. 4 for the Self-Monitoring of Shenzhen Stock Exchange Listed Companies – ChiNext Industrial Information Disclosure (Revised Disclosure Guidance).

In 2021, China's securities regulator (CSRC) started to expressly require listed companies to disclose ESG information. The Revised Disclosure Guidance is the first guidance issued by a stock exchange that gives listed companies more instructions on how to comply with the CSRC's requirements. The Revised Disclosure Guidance also encourages investors to take into consideration more ESG elements when making investment decisions.

PRC Supreme Court announces opinions on providing judicial supports to carbon dioxide peaking and carbon neutrality

On 17 February 2023, the Supreme Court announced Opinions on Providing Judicial Services for Carbon Dioxide Peaking and Carbon Neutrality In Full and Faithful Implementation of the New Development Philosophy Supreme Court Opinion.

Given the increased number and complexity of carbon related cases across China, the Supreme Court Opinion issued this very first document, setting out 24 opinions in respect of how to deal with carbon related cases, such as disputes over energy saving service contracts, carbon emissions trading contracts, etc. The Supreme Court Opinion provides certain standards and helps the courts in China to unify their judgments on such cases.

PRC Ministry of Ecology and Environment (MEE) establishes special ESG working group

According to the speech by an MEE officer at the 2023 Asia-Pacific Financial Forum on 17 March 2023, MEE has established a special ESG working group which supports environmental information disclosure reform in financial sector, cooperates with financial institutions to promote public welfare funds focusing on biodiversity and ESG activities, and directs green financing and investments. The officer also mentioned that MEE was actively promoting the issuance of measures on carbon emission trading.

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SOUTH KOREA

New guidelines regarding the evaluation of ESG bond certification by South Korean credit rating agencies

South Korea's Financial Supervisory Service (FSS) issued new guidelines regarding the evaluation of ESG bond certification by South Korean credit rating agencies (Korean language only). The new guidelines aim to improve transparency and consistency with regards to evaluation methods and standards across credit rating agencies. In particular, the guidelines have been aligned to the International Organization of Securities Commission's recommendations. To date, there are no South Korean laws governing the ESG certification process. The guidelines will became effective on 1 February 2023 and will be implemented as best practice by the Korea Financial Investment Association.

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JAPAN

Japan to build new nuclear power reactors and extend operational duration

The Japanese government approved policies to build new nuclear power reactors and to permit the operation of nuclear reactors beyond the current 60-years limit. In efforts to improve its carbon footprint while ensuring sufficient energy is supplied in the country, Japan's Nuclear Regulation Authority (NRA) has approved new draft legislation and approved an amendment to the Nuclear Reactor Regulation Law to reflect these policies.

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TAIWAN

Taiwan passes the new Climate Change Response Act

Taiwan's Legislative Yuan passed an amendment to the Greenhouse Gas Reduction and Management Act, and renamed it the Climate Change Response Act. Article 4 of the Act codifies Taiwan's ambitions to have "greenhouse gas net-zero emission by 2025". Amongst other climate change related requirements, the new law introduces a carbon fee to be levied on emissions, starting with levies on companies with direct or indirect emissions of more than 2.5 tonnes. According to the Environment Protection Administration (EPA), over 500 companies will be affected by the new levy.

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HONG KONG SAR

Hong Kong SAR launches its International Carbon Marketplace

Hong Kong Exchanges and Clearing Limited announced the launch of Core Climate, a carbon marketplace to connect capital with climate-related products and opportunities. The platform will enable the trading of carbon credits and instruments where the participants will be able to source, hold, trade, settle and retire voluntary carbon credits through the Core Climate platform. Carbon credits on the platform will come from internationally-certified carbon projects from around the world, including carbon avoidance, reduction and removal projects. All projects listed on Core Climate are verified against international standards, such as the Verified Carbon Standard by Verra.

Mandatory climate-related disclosure proposed by Hong Kong Stock Exchange

Proposals requiring companies listed on the Hong Kong Stock Exchange to make mandatory climate-related disclosures are expected to come into effect on 1 January 2024, with interim measures for the first two reporting years and full implementation expected by 2026. The proposed mandatory disclosures are based on the current exposure draft of the climate-related disclosure standards issued by the International Sustainability Standards Board (ISSB). They are categorised under four core pillars: (i) governance, (ii) strategy, (iii) risk management and (iv) metrics and targets. Listed issuers are expected to include in their annual ESG reports information on their exposure to, and management of, climate-related risks and opportunities with reference to the four pillars.

Consultation on green taxonomy published

On 31 May 20203, the Hong Kong Monetary Authority (HKMA) opened consultation on a 'prototype' of a green taxonomy intended to set out a framework for banks and investment funds to classify and label financial products and investments based on their environmental sustainability.

The HKMA plans to develop its taxonomy in phases. It currently plans to roll out a prototype that targets a limited number of sectors and activities.

The Hong Kong SAR is the first jurisdiction to make use of the Common Ground Taxonomy (CGT) to guide its taxonomy.  The CGT was developed by People’s Bank of China and the European Commission to provide a comparative study of the green taxonomies of both China and the EU.  It was first published in November 2021 at COP26.

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INDIA

India's exchange board seeks greater disclosure on ESG standards

The Securities and Exchange Board of India (SEBI) is seeking consultations on ESG reporting required from larger firms, including tighter portfolio and stewardship criteria for ESG investing funds. SEBI has also proposed that the largest 250 companies operating in India make ESG disclosures on a comply-or-explain basis starting from 2024. Many of these companies, depending on their export footprint across Europe and the US, may already be subject to various comply-or-explain disclosure requirements. The consultation paper proposes select key performance indicators (KPIs) for each E, S and G attribute, including across supply chains.

Talk to us to find out if your supply chains are affected by the same disclosure requirements, or to discuss how best to understand the disclosures made in the context of your business.

This consultation paper comes on the back of SEBI's mandatory Business Responsibility and Sustainability Reporting required of the top 1000 listed companies from 2023.

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SINGAPORE

In April 2023, the Monetary Authority of Singapore launched its Finance for Net Zero Action Plan, which focuses on:

• A code of conduct, which will require ESG ratings and data product providers to disclose how transition risks are factored into their products
• Interoperability of taxonomies across jurisdictions
• ISSB aligned disclosures on a risk-proportionate basis
• Climate-related financial risk
• Development of regional sectoral decarbonisation pathways.

This action plan builds on earlier infrastructure for financing the transition, including the expansion of the scope of its sustainable bond and loan grant schemes to include transition bonds and loans, as well as extending the existing insurance-linked securities grant scheme till end 2025, to support the continued growth of investment in catastrophe bonds and additional climate risk financing instruments (eg sidecars and collaterlised reinsurance arrangements).

Let us know if you or your organisation need more information on how best to structure finances and investments in Singapore's green space.

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INDONESIA

Regulating CCS, CCUS and green finance

The Ministry of Energy and Mineral Resources of the Republic of Indonesia issued Regulation no. 2 of 2023 on the implementation of CCS and CCUS. The focus on CCS and CCUS is intended to help Indonesia reach its 2060 net zero goals, while also supporting the country's oil and gas output to 1 billion barrels and 12 billion cubic feet of gas per day. The regulation covers:

• Rights, obligations and liabilities of contractors implementing CCS / CCUS technology;
• Rights of contractors working on injection and storage of carbon emissions generated by third parties;
• Processes for approval of CCS and CCUS projects;
• Health, safety, environmental and social monitoring requirements;
• Activities disclosures.

Indonesia has introduced at least two other regulations which address the implementation of carbon pricing mechanisms.  CCS and CCUS projects can be monetized by a contractor through carbon trading and/or cost recovery from the joint facilities.

Indonesia is also looking to implement "cap and trade" and "cap and tax" mechanisms, both intended to bolster interest and investment in domestic carbon capture and trade by its larger emitters.

Indonesia has also joined the ranks of mainland China and the EU to provide incentives for green bond financing, including a 50% discount for green bond annual recording tariffs from the stock exchange, and a 50% discount of risk weight for financing distribution companies. Launched in March 2023, the Green Taxonomy included within the Sustainable Finance Roadmap Phase II (2021-2025) sets out a number of policies and incentive provisions.

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MALAYSIA

Malaysia launched its first auction on its new voluntary carbon market (the Bursa Carbon Exchange) on 16 March, with approximately RM 7.7 million in carbon credits sold at the minimum reserve price set by Bursa Malaysia, to 15 buyers. Curiously, Malaysia has no supporting regulatory framework of carbon taxation or other carbon credit trading system. Notably, the carbon credits auctioned on the exchange are from greenhouse gas reduction projects in Cambodia and mainland China. Malaysia is otherwise focused on CCS at its depleted offshore fields – with the world's largest offshore CCS facility of 3.3 million tons per annum off Sarawak now in development and due for completion by 2025.

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VIETNAM

Vietnam's long-awaited Power Development Plan VIII (PDP8) was recently approved on 15 May 2023 by the Prime Minister.  It sets out the country's energy roadmap from 2021 to 2030 with its key objectives of ensuring national energy security and commitments towards decarbonisation. It represents the country's ambitious target to significantly increase its generation capacity from 69GW in 2020 to 150GW in 2030.

As anticipated, PDP8 proposes a new direction for its energy mix, allocating a substantial part to renewable energy sources. According to the plan, renewable energy resources will constitute up to 67.5% – 71.5% of the energy mix by 2050 (up from approximately 25.3% in 2020).

For international investors and developers, with PDP8 now approved, the purpose and direction of the country's energy policy is clearer.  The list, and mix, of officially approved projects gives investors and developers greater certainty on the next steps and they should now look to work with the Provincial People’s Committee, Ministry of Industry and Trade and EVN to continue developing these projects.  Many projects have been on hold, awaiting PDP approval, and should now be moving quickly to work with the Provincial People’s Committee on in-principle approval and investor appointment, obtaining the investment registration certificate, land clearance, signing power purchase agreements, and other relevant agreements with EVN.

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Written with the assistance of various Herbert Smith Freehills lawyers across the network, including Reshma Nair, Charles Wong and Tianchan Li.

KEY CONTACTS

Please contact your usual ESG contact or those listed below to find out more.

[show_profile name='Antony' surname='Crockett' jobtitle='Partner, Hong Kong' phone="+852 21014111"]

[show_profile name='Irina' surname='Akentjeva' jobtitle='Partner, Singapore' phone="+65 68688039"]

[show_profile name='Monica' surname='Sun' jobtitle='Partner, Mainland China' phone="+86 10 6535 5122"]

[show_profile name='Nanda' surname='Lau' jobtitle='Partner, Mainland China' phone="+86 21 23222117"]

[show_profile name='Reshma' surname='Nair' jobtitle='Senior Associate, Singapore' phone="+65 68688002"]