SINGAPORE - Even as sustainable finance gains traction around the globe, issuers and investors face practical challenges that could stymie its further adoption. The lack of a common standard complicates measuring and reporting.

Meanwhile, issuers wonder how the additional costs relating to sustainability could be justified even as a global slowdown shrinks margins. Given that Islamic finance shares a parallel interest especially on ethical investing, are the areas of similarities bound to provide some of the answers.

How can capital markets properly value ESG principles?

Sean Henderson, co-head of debt capital markets, Asia-Pacific, HSBC, thinks that companies in Asia do need to pay more attention to ESG factors in their corporate strategy, and that Asia in general is relatively slower in terms of ESG awareness, but that it is moving in the right direction.

“One benefit to doing a green bond is that you have to report to an organization on what they are doing and how they are using the proceeds. The ESG thinking will go down to the business level of how to do business,” says Henderson.

Jean Louis Nakamura, chief executive officer, Hong Kong and chief investment officer, Asia-Pacific, Lombard Odier, believes the deeper implication of ESG is further integration of ESG into the company. “The integration can increase the awareness of the companies in terms of financing cost,” he explains.

Meanwhile, the principles behind Islamic finance can help clarify some of the issues around ESG adoption. Dato' Paduka Syed Mashafuddin Syed Badarudin, chief executive officer, Principal Asset Management, sees a lot of commonality with Islamic finance and ESG, but that “ESG has a more inclusive approach than Islamic finance.”

Applying an ESG approach can lead to potential long-term sustainable return, and Henry Loh, investment manager – Asian fixed income, Aberdeen Standard Investments, says “We are looking at ESG factors that can bring us five to ten-year sustainable return.”

Randolf Tantzscher, managing director – indices, IHS Markit notes that ESG is the top conversation he has with clients. “Everyone is looking at ESG differently. Index providers can give a black and white approach to investors, but when it comes to an ESG index, we are still at the preliminary stage. If everyone has their own ESG approach, it is difficult to see a benchmark to the market,” he says.

Dato' Paduka Syed Mashafuddin Syed Badarudin also thinks along similar lines in that it will take years to form an industry recognized standard of ESG process.

ESG has a much broader impact now; it is not just about green bonds - it can influence each and every single investment decision. “Third-party verification and opinion from regulators are very important,” says Henderson. “If you don't have an answer for your ESG approach as an issuer, you cannot maintain your investor base.”

Nakamura thinks that some rating agencies are late in incorporating ESG criteria maybe because they feel that they do not have much impact on the long-term solvability of the companies they rate. This opens the door for active sustainable managers to create outperformance.