Mazars announced the release of a collaborative report with the Tokyo Institute of Technology in Q4 2022 – “Sustainability reporting in Asia: Are the EU’s initiatives the benchmark for ESG disclosure in the region?”
Prepared by the Tokyo Institute of Technology, the report aims to provide a better understanding of the EU’s sustainability reporting landscape and how it compares to four key Asian jurisdictions: Japan, Korea, Thailand, and Singapore. While not representative of the entire continent, these four countries face similar challenges experienced by other Asian jurisdictions, including India, China, and Indonesia.
In anticipation of changing global sustainability reporting landscapes that increasingly take account of shifting ESG transition risks and opportunities, the report provides Asian regulators, Asia-based business leaders, and other stakeholders with information and critical thinking points needed to enhance a broader understanding of the obstacles and opportunities of the various sustainability reporting approaches in the EU and Asia, including:
- An overview of the sustainability reporting landscapes in the EU and Asia and how recent disclosure developments shape the availability of quality corporate ESG data.
- Contextual insights and perspectives from EU-based and Asia-based experts underpin the challenges among Asian regulatory, corporate, and financial stakeholders to craft adequate responses that balance the sustainability data expectations of international investors and the often-complex domestic economic realities.
- A mapping of sustainability reporting frameworks, discussing the stringency levels of the main reporting obligations across jurisdictions, thus enabling the establishment of a comparative reporting benchmark that will facilitate the identification of the current levels of ambition across the covered jurisdictions.
- An evaluation of the transposability potential of select EU’s sustainability reporting initiatives by exploring the case of how the EU’s shifting approaches and recent adjustments towards double materiality and the establishment of a common taxonomy for green activities have gradually led to differing levels of acceptance for its plans among Asian law- and policymakers, as well as business leaders.
More stringent sustainability reporting beginning to bite
Sustainability reporting stringency is accelerating globally in terms of stakeholder scope and materiality considerations. Currently, the most advanced proposals originate from the EU, with plans announced by the US Securities and Exchange Commission (SEC) also reasonably advanced. The EU’s existing and planned frameworks represent the current global benchmark in sustainability reporting stringency, given the focus on mandatory rules and the gradually broadening scope of stakeholders covered under them.
Asia remains generally less stringent in terms of sustainability reporting-related laws, rules or regulations of mandatory nature. For example, Thailand and Singapore require sustainability reporting on a ‘comply or explain’ basis for the time being. Japan plans to introduce mandatory sustainability reporting for large listed companies between FY2022 and FY2023. South Korea is maintaining voluntary ESG disclosure until at least 2025.
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Noticeable divide in reporting obligations
There is a noticeable divide in the areas and topics companies will need to cover in their sustainability reporting, with the EU opting for a multi-stakeholder approach rooted in the ‘double materiality’ concept inspired by the GRI’s Global Sustainability Standards Board (GSSB) approach. However, all of the observed Asian jurisdictions opted for investor-orientated ‘single materiality, mostly in line with the International Financial Reporting Standards (IFRS), International Sustainability Standards Board (ISSB) and the Task Force on Climate-related Financial Disclosures (TCFD).
Also, whereas the EU and the US SEC require or would require independent assurance of reported sustainability information, first limited and then reasonable, the observed Asian jurisdictions do not mandate external third-party verification, with only Singapore and Japan recommending it.
Substantial economic risks detected
The report identifies substantial economic risks for globally operating Asia-based companies and suppliers in case of sustainability reporting-related regulatory divergence and subsequent non-compliance with EU laws, rules, and regulations. On the one hand, EU-based companies could potentially face competitive advantages as they are more ESG-aligned than their peers. On the other hand, there are competitive disadvantages, primarily due to increased costs associated with increasing corporate reporting requirements.
One of the most substantial challenges for international corporations and regulators concerns the transposability of sustainability reporting-related rules. For example, the Corporate Sustainability Reporting Directive’s (CSRD) new provision requires non-EU companies to produce sustainability reports if they generate a net turnover of more than €150m in the EU. While this requirement does not affect third-country undertakings from jurisdictions with sustainability reporting standards considered equivalent to the EU’s, it constitutes a very material example of how the EU’s sustainability reporting plans will impact sustainability reporting in Asia and the potential risks of regulatory divergence.
According to the report, the EU’s sustainability reporting rules are seen as overly stringent for most Asian jurisdictions as they either do not sufficiently take into account the significant natural resource and fossil fuel exposures of local economies or the emerging economy status of many Asian countries. In terms of sustainability reporting, the key provision facing pushback is the double materiality approach of the EU, which numerous Asia-based industry groups and regulators consider challenging to integrate in the near term. Asian jurisdictions generally favour a financial materiality-orientated global baseline for sustainability reporting, closely aligned with the TCFD recommendations and the proposed ISSB standards.
While the CSRD plans might create new obligations for Asia-based corporations, still many of the EU’s sustainability reporting-related plans overlap with Asian framework plans and thus present potential pathways to increase transposability and reduce regulatory divergence. Therefore, the EU taxonomy could serve as a template there are considerations to allow certain gas and nuclear-related activities to be considered contributory to sustainability goals. While highly controversial and contested by many ESG stakeholders, including its own expert advisory body, this revised taxonomy would align the EU to a higher degree with the various ‘transition taxonomies’ of several Asian jurisdictions, including Japan, Korea, and ASEAN.
Commenting on the report’s findings, Mazars managing partner, Emmanuel Thierry, thanked the report’s lead author, Dr Kim Schumacher, School of Environment and Society at the Tokyo Institute of Technology, adding: “We hope the report’s findings help regulators, business leaders, investors, and other interested stakeholders to gain a better insight into the EU experience and understand the existing context of companies and regulators in Asia. Providing such insights and ideas helps to inform sustainability strategies and practices, broadening the discussion about the path to equivalence or convergence of standards.”
Mazars director of sustainability and head of risk consulting, Chester Liew, said: “The report findings reveal significant progress in ESG reporting and disclosure in key Asian jurisdictions, with the aim of aligning with international standards. The collaborative report aims to provide a comprehensive benchmark for sustainable policy through a comparison of ESG provisions across jurisdictions. We hope this report will contribute to a more transparent and sustainability-aligned corporate sector in Singapore and other rapidly growing economies in the region.”