With rising regulatory enforcement, increased consumer focus on environmental and social issues, along with G7 countries pushing forward climate-related financial reporting, ESG has become a business imperative, which has been further accelerated by the COVID-19 pandemic.

According to Baker McKenzie's latest report "From Strategy to Action — Advancing ESG in Asia Pacific", almost half (46%) of the 800 surveyed business leaders across the Asia Pacific say they are approaching sustainability issues more seriously than before the pandemic.

In fact, 90% of the respondents say ESG is at least a part of the discussion when their companies consider acquisitions or other investment activities. This has no doubt added another layer of deal complexity.

Robert Wright, Partner, Baker McKenzie, Hong Kong points out that:
“Increased investor demands and the roll out of mandatory disclosure requirements are driving improved ESG review and reporting practices across the region. However, while it is encouraging to see many global asset managers well advanced on ESG due diligence protocols and governance regimes, there are concerns that others outside the large institutions may require greater support in areas such as ESG training, access to data and analytical tools to evaluate ESG risks."

Part of the problem, particularly for multinational organizations, is the fragmented nature of ESG regulation across Asia Pacific. Currently, regional ESG disclosure frameworks are not as well-established as those in the European Union and emerging in North America. Clear and consistent taxonomy is absent, and global ESG standards, frameworks and initiatives are not universally adopted.

When asked about the greatest ESG-related risks facing their businesses, regulatory enforcement topped the list, followed by new regulations and changing buyer behavior.

Commenting on the issue of managing ESG risks, Mini vandePol, Asia Pacific Head of Compliance and Investigations, shares:
"In our experience, the 'S' (social) aspects of ESG are often not well understood or managed. The scope of issues in this area are multifaceted, comprising compliance risks such as ethical supply chain systems as well as health, safety and product liability. As we engage with companies and investors, it is increasingly clear that getting the 'S' wrong can result in significant business risk with potentially long term damage to reputation."

For many businesses, the United Nations' Sustainable Development Goals (SDGs) has become a tangible means through which to move their ESG initiative. In fact, 68% of respondents say they embed SDGs into their strategic planning in some way. However, this figure varies across the region and industries, with businesses in Japan and Australia leading ahead (99% and 98% respectively), followed closely behind by Singapore (89%), India (83%), Hong Kong and Indonesia (each with 64%). Similarly, businesses in Australia, Singapore and Japan are better prepared for a possible increase in climate-related regulation. The views across industries shows that Healthcare and Life Sciences companies and Financial Institutions edge slightly ahead of organizations in other sectors in terms of embracing ESGs in their planning.

Such variance can be attributed to government action and the make-up of primary industries in each economy. In Australia, the focus on ESG issues existed even before the crisis was significant, not least because of strong regulatory requirements on financial reporting. For example, the Australian Securities and Investments Commission (ASIC) has increased monitoring efforts on climate-related financial disclosures and Australia’s banking regulator, Australian Prudential Regulation Authority (APRA) is in the process of finalizing guidance around investments vis-à-vis climate risk.

"It is clear that few companies have yet built ESG frameworks and processes that are sufficiently advanced and rigorous for the realities of today’s marketplace. Given the growing importance of external factors, including consumer demand for improved ESG standards, Asia Pacific businesses now need to move particularly quickly to resolve shortfalls and gaps. This will also help with region-wide progress on ESG regulation harmonization and collaboration, which can in turn, have positive impacts on the economic recovery and renewal in the region," Ilona Millar, Global Head of Climate Change Practice, said.

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