These days no company, and no investor, can be unaware of the importance of ESG. Consideration of environmental, social and governance factors has become a risk management necessity, but it’s also increasingly an ethical imperative, particularly where climate change is concerned. With that comes an increasing requirement for companies to disclose their ESG impact, allowing investors to make informed decisions—but exactly how they do so can still be a confusing, contested landscape.

Assessing the performance of, say, an impact investment might well be quite difficult in terms of reporting on the ground, especially given that projects are often located in developing countries. But such investments have some huge advantages when it comes to measurability. “They can be easier to measure than listed companies,” says Garth Bregman, head of investment services, APAC for BNP Paribas Wealth Management. “They tend to be relatively narrow in scope, and the positive impact they hope to have is stated upfront.”

For listed companies, it’s more complicated. ESG disclosure is increasingly mandated by stock exchanges, but the pressure to do so goes far beyond regulation: it’s coming from a wide range of sources, including investors, regulators, politicians, suppliers and corporations themselves. In addition to listing requirements, there has also been a proliferation of ESG rating systems.

“In the Hong Kong context, in the last 18 months to two years, it’s been hugely investor driven,” says Sammie Leung, ESG partner for PwC mainland China and Hong Kong. “Four or five years ago, a lot of clients were saying ‘We’ll just do the minimum’. In the past 18 months, that’s become ‘We’ve got to do something’. Now even state owned enterprises are involved. No one wants to get a bad rating.”

According to Emily Bayley, project lead of ESG investing initiatives for the World Economic Forum, which has worked extensively on ESG standards, it’s also percolated down to privately held corporations.

“Even companies that are not publicly traded are producing reports, to improve their attractiveness to potential employees and demonstrate how they’re walking the talk,” she says.

Phineas Glover, head of ESG, Asia-Pacific, securities research at Credit Suisse, says that the number one force driving ESG disclosure is big asset holders: the likes to sovereign wealth funds and government pension funds. “The penny has dropped with them. They have long term liabilities and higher exposure to ESG-related risk, especially climate change. That has percolated through to stock exchange regulators, directors’ core legal obligations and governments.”

In Asia, there’s also pressure from other parts of the world with strict ESG requirements: companies risk missing out on financing if their ESG disclosure is inadequate, while EU and US companies are also under increasing pressure to ensure compliance along their supply chains.

“Companies that have EU or American clients they export their goods to, these days their clients are pushing them to at least get certain ratings; otherwise they’re disqualified as an approved vendor,” says Leung.

Hong Kong has mandated ESG reporting for listed companies since 2016, but with the 2019 reporting amendments that came into force in 2020, it established an ESG reporting regime widely considered world leading. “There’s a race to the top, with Hong Kong and Singapore racing to be the green finance centre of Asia,” says Glover.

There are signs that mainland China might be heading in the same direction. In May 2021 regulator the China Securities Regulatory Commission started a consultation that could result in a dramatic tightening of reporting requirements, potentially giving the jurisdiction a world leading role when it comes to ESG disclosure—and, given that China produces over a quarter of global carbon emissions, that could have profound consequences.

“When I look at the China market, one of the biggest impediments has just been a lack of disclosure by listed companies,” says Glover. “This might be seen like a bolt of lightning from the blue, but the development of sustainability in China has been steadily growing since 2016. This is just the next step. ESG investment is still relatively nascent in China, but there’s a massive opportunity to grow.”

On top of all these local listings rules lies a patchwork of other standards and ratings systems, and this fragmentation can be a major issue for companies and investors alike.

“The main challenge is there’s no standard for ESG; there’s a proliferation of private standards and jurisdictional reporting requirements,” says Bayley. “There’s a lack of consistency and compatibility.”

It’s an issue her organisation has been working on, with the WEF partnering with the Big Four accounting firms to release the snappily titled Toward Common Metrics and Consistent Reporting of Sustainable Value Creation, a supposedly universal template for ESG disclosure, in September 2020.

“Companies clearly get frustrated when there are a million different yardsticks that measure things in different ways,” says Glover. “Part of the frustration is just that it’s a new industry, and people are coming to terms with that.”

The main negative impact for companies of all this complexity, of course, is increased costs; indeed, ll this extra reporting could well be a bonanza for a range of advisors, consultants and auditors.

“A large number of companies don’t want any changes; they scream about additional costs,” says Leung. “But there are also companies that understand this is not a problem that’s going away.”

A big part of the challenge is simply that this all new. In many cases, traditionally secretive companies are not likely to be terribly keen on all these demands for greater transparency. And then there’s the business of working out what to actually measure, and how to measure it. Companies are very used to presenting financial information, and although it can be tremendously complex, it’s mostly quantitative: reducible to numbers. Something like, say, environmental impact isn’t necessarily.

“There’s a fundamental difference,” says Glover. “Financial reporting is an outcome; ESG is typically an input.”

Adds Bregman: “How do you measure greenhouse gas emissions? Female involvement? The treatment of workers? If you have reporting standards, generally you want it to be as quantitative as possible.”