Singapore, amongst many other Asian countries have publically embraced sustainability; dealing with ... [+]
With the surge in popularity of environmental, social and governance (ESG) investing, it has become more important than ever to ensure that related companies and projects are as “green” as they purport to be. PwC estimates that ESG-related assets under management (AuM) will reach US$33.9 trillion by 2026, from US$18.4 trillion in 2021. With a 12.9% annual growth rate, ESG assets are on track to make up 21.5% of global AuM by 2026.
With that in mind, throughout East Asia, governments are developing different approaches to combat the growing problem of “greenwashing” – the act of making false or misleading statements about the environmental benefits of a product or practice. Because consumers are often willing to pay more for eco-friendly products, greenwashing can be lucrative for the perpetrators.
The same principle holds true in investing. For instance, given the surge in exchange traded funds (ETFs) that invest according to ESG principles, regulators worry more that fund managers are greenwashing. ETFs with an ESG label more than doubled from 2020 to 2022, reaching nearly 1,300 by the end of that year, according to the London-based consultancy ETFGI.
Leading the way in East Asia thus far when it comes to combating greenwashing is South Korea, while other jurisdictions like Singapore and Hong Kong are also making progress. Mainland China is moving to address the problem, but still has some work to do.
Leading With Baby Steps
A new law is currently making its way through Korea’s National Assembly that would slap a 3 million won ($2,271) fine on companies judged by the country’s Ministry of Environment to have deceived the public about their green credentials. The law is likely to pass before the end of the year.
While the fine is modest, South Korea is nonetheless the first nation in East Asia to draft a law that would fine firms for false or exaggerated green claims. The law also signals a significant shift in the South Korean government’s approach to greenwashing. It previously dealt with the problem by providing so-called “administrative guidance” to offenders, without achieving good results.
“Just as regulating tobacco adverts stopped misleading consumers, the same kind of regulation with the right sanctions will prevent greenwashing,” a spokesperson for South Korea’s Ministry of Environment told Reuters. “To achieve net zero by 2050, business practices cannot remain the same.”
Meanwhile, South Korea’s Financial Supervisory Service (FSS) issued guidelines to enhance transparency on the methods and procedures used by credit rating agencies to perform ESG bond certification evaluations, which became effective February 1. These are the first regulations of their kind in the country.
Progress In Aspiring Green Finance Hubs
Both Singapore and Hong Kong have made some key strides in addressing greenwashing. In April, the Monetary Authority of Singapore (MAS) unveiled an action plan to shore up the city-state’s budding status as a green finance hub and benchmark environmental reporting standards. During the launch of the MAS’s plan, Deputy Prime Minister and Finance Minister Lawrence Wong noted that the regulator sought to also address so-called “transition-washing” – when companies use financing intended to be green to bankroll carbon-intensive companies.
"Asia is a key battleground in this war against climate change because Asia emits about half of global greenhouse gas emissions,” Wong said in May.
Additionally, the MAS will scrutinize companies that apply for government grants to support their green moves. In April, the MAS said that such grants will be expanded to cover transition activities and that it would set aside an additional SG$15 million ($11.2 million) over the next five years to fund them.
Hong Kong, meanwhile, has done some important research on greenwashing – though it has yet to translate into concrete regulation. In November, the Hong Kong Monetary Authority (HKMA) issued a report that presented evidence that about 33% of corporate green bond issuers are benefiting from issuing those bonds while not slashing their greenhouse gas emissions. However, even without regulatory discipline, the greenwashers were penalized by the market: The report found that companies guilty of greenwashing were less likely to issue green bonds again or would have to or have to pay higher issuance costs if they were able to re-issue bonds.
The HKMA report concluded that establishing well-defined green bond taxonomies and improvements in environmental disclosure requirements could further mitigate greenwashing behavior.
China’s Challenge
As one of the largest markets in the world for green finance, what China does to curb greenwashing will have global ramifications. After all, it is currently the world’s largest emitter of greenhouse gases, accounting for nearly 1/3 of the global total. Beijing is well aware of the effect its emissions have on climate change and has pledged to be carbon neutral by 2060, with emissions peaking in 2030.
Though China has established a large green bond market, it is undergoing some growing pains. Transparency is often not high, raising greenwashing concerns among international investors.
A Wall Street Journal report found that in the first five months of 2021, 33 of the 127 green bonds issued in China failed to meet criteria set by Climate Bonds Initiative (CBI). CBI said that proceeds from green bonds sold in April 2021 by Zijin Mining Group and China Petrochemical Corp would be used to build solar panels – but the panels would likely support the firms’ respective carbon-intensive traditional businesses.
In August 2022, China took a key step to fight greenwashing: The Shanghai Stock Exchange began requiring that 100% of the proceeds from green bond issuances be invested in green projects such as clean energy, up from 70% previously.
Further, the China Securities Regulatory Commission (CSRC) ordered both the Shanghai and Shenzhen exchanges to revise rules to harmonize bond issuances with the country’s new related regulations – the China Green Bond Principles. These guidelines largely align with those issued by the International Capital Market Association (ICMA.
Towards A Sustainable ESG Future
There is good reason to believe that East Asian jurisdictions will continue to heighten their vigilance against greenwashing for several reasons. First, governments in the region are clear-eyed about the challenge posed by climate change, and avoid the politicization of the issue that can hamstring sustainability efforts elsewhere in the world. Second, they are also well aware that greenwashing could have a highly detrimental effect on financial markets, particularly given that climate finance is at a fledgling stage in the region. Third, they are cognizant of public opinion and the positive implications for public trust in government when climate change risks are managed responsibly.
South Korea is off to a strong start with its legislation that allows regulators to fine companies engaging in greenwashing. The key now is for the legislation to pass in a timely manner and be implemented. It could serve as an example for other countries in the region.
For Singapore and Hong Kong, combating greenwashing will integral to their respective efforts to establish themselves as green finance hubs. It will be important for them to find the right equilibrium between regulatory guidance and market-driven action. As HKMA found in its report, the market does not look favorably upon companies that misstate their green credentials.
Finally, China’s National Development & Reform Commission must require Chinese state-owned enterprises – which issue more than half of green bonds at present – to adopt the China Green Bond Principles. Otherwise, they could issue green bonds and then use the proceeds for something carbon-intensive. In fact, some already do: the coal-dependent power producers China Huaneng Group, China Huadian Corporation and State Power Investment Corporation.
If SOEs continue to play fast and loose with green bonds, it will be detrimental for both China’s green finance industry and its wider battle against climate change.
