Asia ESG fund compliance costs expected to soar

As regional and global environmental, social and governance-related regulations evolve and proliferate, the costs for Asian fund firms of keeping up with the various requirements across markets will continue to rise, experts say.

But with enforcement action for failing to conform with anti-greenwashing rules expected to grow, experts highlight that the potential costs and reputational risks of non-compliance are rising too.

Xuan Sheng Ou Yong, Singapore-based green bonds and environmental social and governance (ESG) analyst at BNP Paribas Asset Management, said compliance and operational costs have continued to increase as regulators in different markets make adjustments to ESG investing and disclosure frameworks.

“I don’t think we are close to a plateau — asset managers and investors will continue to spend more,” he said.

Greater resources are needed not just to pay for developing in-house strategies and to communicate these to investors, he noted, but also to comply with different European and Asian regulatory requirements.

“I wouldn’t expect anyone to reduce their investments in this space in the coming years,” Ou Yong added.

The Monetary Authority of Singapore introduced its first-ever guidance for disclosure and reporting for retail ESG funds last July, shortly after announcing plans to conduct climate-related stress tests on fund firms.

The MAS-backed Green Finance Industry Taskforce also rolled out a second green and transition taxonomy consultation last May, including guidelines for asset managers on how to apply the framework. This followed the release in February of green skillset guidelines, which aim to encourage firms to design new training programmes.

The moves are part of a wave of new regulatory requirements in Singapore and have been met by calls for greater clarity from financial institutions.

While fund companies now view incorporating ESG practices as integral to their business, questions are being raised about the resources needed to keep up with all this new regulation.

“How do you square increasing regulations and operational costs with ESG as a growth driver — it’s almost like a chicken and egg problem,” said Ng Sze Yoon, Singapore-based principal of distribution insight for Asia Pacific at Broadridge.

ESG is becoming more of an “infrastructure capability” as opposed to a standalone investment strategy, said Ng, and asset managers now needed to integrate it across the entire business, including investment products, servicing and operations.

Existing ESG regulations and standards are also evolving and shifting, with many asset managers currently facing challenges complying with the European Union’s Sustainable Finance Disclosure Regulation’s level two standards, for example, which recently came into force.

The SFDR’s level two standards come with a stricter definition of what can be classified as the “darkest green” Article 9 fund, as well as an increased reporting requirement for such funds.

BNPP AM’s Ou Yong said the French manager’s global sustainability team had more than tripled since 2019.

Despite the rising costs of having to comply with ESG regulation, more than two-thirds of Singapore fund firms see increasing investment into ESG strategies as the top expected driver of growth over the next three years, according to an Investment Management Association of Singapore survey, with many viewing it as a means to achieve differentiation.

Sustainable investing remains “if not the main, it’s one of the strategic growth drivers” for BNPP AM in terms of flows and asset growth, said BNPP AM’s Ou Yong.

But for managers that are not making ESG a priority, the pace of development in ESG regulations means that time is running out, as institutional investor expectations rise.

“Anybody who wants to stand out beyond the rest of the playing field has to demonstrate a lot more ESG credentials and capabilities,” Broadridge’s Ng said.

Grace Chong, Singapore-based counsel and head of the Singapore financial regulatory practice at Gibson Dunn, said fund firms also had to think about the increasing risks of not complying.

Many firms are also banking on the fact that Hong Kong and Singapore broadly accept SFDR standards as being locally compliant, but local regulators could add their own additional requirements at any time.

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