ESG in Asia. Is implementation sufficient? Is it worth pursuing to begin with?

Article by Kye Li Ong, University of Warwick

Support for implementation of ESG investing style is a complete fraud and used as a marketing strategy which doesn’t encourage best practices nor does it assist the climate crisis![1]

Environmental, Social and Governance (“ESG”) factors are increasingly integrated by financial services, insurance and other professionals as greater support is gained from investors who desire to make socially responsible investment decisions. Historically, a heavy focus on financial returns have left the topic of ESG to the government or NGOs. However, efforts in 2006 led by then-UN secretary general Kofi Annan to create global standards for responsible investing after the financial crisis sparked discussions on balancing long-term business growth with short-term profit pressures. As per the opening statement, it is clear that the social capital founder and CEO Chamath Palihapitiya falls into the inevitable group of ESG critics. Whilst the basis of his claims are well-founded, the impacts of the Covid-19 pandemic have reflected that companies with ESG strategies in place emerge more resilient and sustainable. For instance, ESG funds which are linked to material sustainable characteristics hold up better than conventional funds.[2] Aligning one’s investment strategies with ESG factors and characteristics would bring about long-term financial and economic growth.  Fundamentally, it is simply the right thing to do.

While companies’ failure to align their strategies and ESG preferences results in sell-outs in Europe[3], more prominent short-term profit pressures in Asia remain one of the reasons for reluctance in implementing ESG analysis at its fore[4]. Priorities are on resolving some of the most pressing development issues such as insufficient and inefficient infrastructure in the energy, transportation or water supply industry. Steady rise in moving towards ESG strategies is only seen in more developed Asian nations. For instance, Hong Kong stock exchange’s regulator introduced ESG-focused listing requirements and enhancement of its corporate governance and transparency.[5]Lee Hsien Long in his 2019 Rally Day speech also highlighted the Monetary Authority of Singapore’s plans to develop the country as a green finance hub and promote sustainable financing[6]. Japan’s government pension investment fund (GPIF) has similarly put ESG at the heart of investment strategy, by investing in sustainable indexes, promoting innovative investment practices and improving ESG standards in its passive portfolios[7].

Asia’s role is imperative in implementation of ESG principles. As Douglas Flint, chairman of Standard Life Aberdeen notes, there are three major impacts of ESG in Asia, i.e. climate change mitigation, improvement of air quality and the production of sustainable palm oil and natural rubber.[8] From a finance perspective, the debt capital markets in Asia will potentially be significantly deepened if bond investments are screened based on ESG investment principles. It would serve as a capitalist to mobilise additional private capital from institutional investors as well.[9] That said, striking a balance in emphasis on individual limbs of the ESG principles is key.

The disruptive impacts of heat-trapping emissions from burning fossil fuels and rain forests pushed the issue of climate change into the spotlight. For the first time in the Global Risk Report 2020 survey’s 10-year outlook, the top 5 global risks in terms of likelihood are all environmental.[10] It is now essential to include climate reforms in political agendas. Plus, the new wave of shareholder activism is putting heightened pressure on companies to comply with their demands. For instance, increasing pressure from investors and activists over climate emissions led to Shell becoming the latest energy major to announce a goal to become net-zero business, seeing a cut in emissions from its own operations, including the production of oil and gas by 2050.[11]

Despite the aforesaid, the environmental limb of ESG is lacking in implementation. According to ESG survey by CFA Institute, corporate governance was most often integrated into investment processes.[12] In most markets, incorporating environmental and social factors in the investment process are only in its early stages. This pattern is similar when reflecting on how often ESG issues affect corporate bonds and sovereign debt, with the governance factor most often incorporated in investment processes.[13]

Ideally, a holistic ESG approach should be pursued. This covers a wide range of areas – from climate change and resource efficiency, to human rights and community engagement, antibribery and corruption, transparency and disclosure and finally, product governance and risk management more generally. One way of moving towards this direction can be through altering companies’ screening approach. Adopting a positive screening approach instead of negative investing approach towards ESG ensures a more detailed due diligence exercise to be carried out.[14] At the bedrock of the former form of ESG investing is the recognition of ESG principles as a strong indicator of sustainable business. On the other hand, the latter is limited as it fails to directly address the social and environmental risks faced by most companies.[15]

Asia is playing a good game with the cards thrown their way. The growth of ESG monitoring and reporting in Asia is promising, despite being in its early days of integration. Ultimately, the traditional mantra of placing the social good as primary consideration over financial outcomes is fundamental. Investee companies should avoid approaching ESG monitoring and reporting as a box-ticking exercise as the tendency to focus on ESG as a marketing slogan instead of genuine promotion of its values is greater. According to the BNP Paribas ESG Global Survey 2019, concern over the quality, accuracy and comparability of ESG data constitute 66% of the top barriers to ESG integration.[16] Asian nations would struggle more significantly as compared to their European neighbours due to the aforementioned barriers. With fewer standards and little verification with regard to ESG disclosures and ESG data, much focus need to be directed towards improving these aspects. Beginning with collaborative work between investors and companies by agreeing on the reporting of material ESG issues would be a desirable first step to promoting the standardization of ESG data. All in all, placing a shared climate goal over industry profits would promote a greater, cleaner and brighter landscape for society and its economy.

[1] Pippa Stevens, ‘ESG investing is a ‘complete fraud,’ Chamath Palihapitiya says’ (CNBC, 26 February 2020)

[2] Pathma Subramaniam,  ‘Cover Story: Resilience amid turmoil’ (The Edge Markets, 26 June 2020)

[3] Maddy White, ‘Norway’s wealth fund blacklists major energy and commodity players over ESG concerns’ (Global Trade Review, 15 May 2020)

[4] Moody’s Investors Service Research announcement, ‘Moody’s – Risks are rising for coal-fired generators in Asia as transition towards renewables continues’ (8 May 2019)
Full report, “Power – Asia: Climate goals, declining costs of renewables signal decreasing reliance on coal power’ can be accessed at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1145596

[5] HKEX Corporate Social Responsibility Report 2019

[6] Prime Minister’s Office Singapore, ‘National Day Rally 2019’ (18 August 2019)

[7] Slobhan Riding, ‘World’s biggest pension fund steps up passive stewardship efforts.’ (Financial Times, 16 September 2019)

[8] Douglas Flint, ‘Asia has a crucial role in the development of sustainable finance.’ (Financial Times, 11 September 2019)

[9] Ibid

[10] World Economic Forum, The Global Risks Report 2020 15^th Edition

[11] Katherine Dunn, ‘Shell becomes the largest global energy company to commit to a net-zero emissions goal by 2050’ (Fortune, 16 April 2020) | Shell, ‘Shell’s Ambition to be a Net-Zero Emissions Energy Business’

[12] CFA Institute, ‘ESG Integration in Asia Pacific: Markets, Practices, and Data.’ (2019 CFA Institute)

[13] Ibid

[14] Kate Hodson, ‘Sustainable Investing: what is it and what is the future of sustainable investing in Asia?’ (Ogier, 30 September 2019)

[15] Ibid

[16] BNP Paribas, ‘The ESG Global Survey 2019’