ESG and Asia – A Framework for Growth

ESG investments have been growing in popularity over recent years. With so many companies now wanting to appear to be doing their bit for ethical causes, there is much to be gained from dipping one’s toe into these investment opportunities.

For the uninitiated ESG stands for Environmental, Social, and Governance and refers to investing in companies which score highly on metrics of environmental and social responsibility. What kind of carbon footprint does the company in question leave? Does it try and make its supply chains as sustainable as possible? These are all factors which can impact an organization’s environmental score.

Social relates to matters of fairness and equality such as providing opportunities to LGBT+ people, women, and other ethnic groups, as well as how companies engage with charitable programs outside of their normal realm of business. Governance, meanwhile, refers to the way a company actually drives change, from executive pay to diversity in leadership as well as how it responds to and interacts with shareholders.

For many people, ESG investment is a very personal matter, and they will actively seek out companies with ESG score which align with the issues they personally find most important. Some will simply make all high ESG scoring investments a priority, while others will devote a cursory proportion of their investment portfolio to them.

ESG and Asia

The Asia-Pacific region has historically been rather slow on the uptake when it comes to seizing the opportunity presented by ESG investment opportunities. Recent research by SP Global has discovered that just over 70% of government entities, insurers, pension funds, private banks, and other investors across, Hong Kong, Taiwan, Australia, South Korea, Japan, Singapore, Thailand, Malaysia, Indonesia, the Philippines, and India have less than ten percent of their current AUM invested in ESG related mandates.

While the COVID-19 emergency has made a difference to these numbers, with 49% of investors having increased their ESG exposure during the crisis or are otherwise planning to do so, just shy of half (46%) state that the pandemic has made no difference to their ESG exposure.

However, all this is beginning to change as some areas of the Asia-Pacific region are beginning to wake up to the opportunities of ESG investment. Hong Kong and Singapore are chief among the governments taking the lead to promote ESG investment as a core part of their economic growth agendas. Hong Kong is embarking on a developmental strategy which would see the city become a regional hub for sustainable banking and green finance, while the Prime Minister of Singapore highlighted the importance of ESG to the nation’s economic progress in a Rally Day speech in 2019. The respective stock exchanges of both have introduced ESG guidelines for sustainability reporting.

Singapore-based global investment brand, Temasek has committed to and is continuing to make roads towards carbon neutrality, and Japan’s Government Pension Investment Fund (the world’s largest pension fund) placed ESG at the heart of its investment strategy with several initiatives including, investing in sustainable indexes, promoting innovative investment practices and improving ESG standards in its passive portfolios. However, some recent reports have suggested the GPIF has cooled a little on ESGs over fears that it may simply be another bubble waiting to burst and has suggested it may be prudent to not place all one’s eggs in the ESG basket just yet.

Driving ESG Investment

For those investors in the Asia-Pacific region who are ready to get on board the ESG investment train the conversation then turns to how we go about driving such investment in the area.

One such innovation comes in the form of the Sustainable Capital Markets Initiative (SCMI). This project seeks to drive investment in ESGs by developing the ESG Framework, as well as improving standards and building responsible investment capacity with corporate bond issuers, rating agencies and institutional investors and other market participants. It’s hoped that these elements working together will improve ESG disclosure and rating coverage in emerging Asian markets.

“The SCMI consists of four pillars” writes AIIB, the brand behind the initiative:

• AIIB capital markets portfolios, including the AIIB Asia ESG Enhanced Credit Managed Portfolio and the Asia Climate Bond Portfolio.
• Sustainability research on the emerging issues and key trends relevant to the portfolios that drive sustainability investing in infrastructure and other productive sectors in Asia.
• Promoting expanded sustainability coverage of corporate issuers from targeted Asian countries with better transparency and disclosure.
• Deepening the debt capital markets in emerging Asia and improving the understanding of sustainability through knowledge sharing and industry engagement.

However, one of the biggest challenges facing the development of an ESG framework is the need for a common language. At present ESG ratings are often the subject of intense debate regarding common definitions and metrics and the criteria different agencies use to score the ESG performance of organizations. This can be confusing for asset managers, investors, and the companies themselves and they can find two agencies score differently based on differing criteria.

In 2019, the European Union released a taxonomy for sustainable business activities, which may provide a solid basis for adopting a common language for ESG company ratings.

“The EU taxonomy is a classification system, establishing a list of environmentally sustainable economic activities,” writes the EU. “It could play an important role in helping the EU scale up sustainable investment and implement the European green deal. The EU taxonomy would provide companies, investors, and policymakers with appropriate definitions for which economic activities can be considered environmentally sustainable. In this way, it should create security for investors, protect private investors from greenwashing, help companies to become more climate-friendly, mitigate market fragmentation and help shift investments where they are most needed.”

However, this then presents the herculean challenge of getting all ESG stakeholders to agree on this course of action.

Final Thoughts

Asian investors are applying a broad set of practices and perspectives which each represent their own stage of ESG maturity and are trying their best to address the problems and challenges of their respective fields. However, in order to push through this stage of the process, investors must be willing to break with tradition and challenge the old ways of doing things.

Once this process begins, it will begin to develop a body of evidence of the viability and profitability of ESG investments and bring the nay-sayers around to this way of thinking. These pioneers can then act as thought leaders for the ESG investment space and drive further uptake in the space.

The gradual gathering of evidence and the establishment of common language and best practices will help investors in the Asia-Pacific region leverage ESGs and chart a path for sustainable growth as we move through 2021 and beyond.