Environmental, social and governance investing (ESG) is gaining traction, with a University of Oxford study suggesting strong sustainability practices deliver better investment performance over time.
Asian countries are adopting the ESG norms at a much slower pace as compared to western counterparts. Currently, more than 72 percent of the S&P500 companies report on sustainability.
In Asia, only a few stock exchanges like Singapore, Malaysia, Hong Kong and Thailand have mandated sustainability reporting from their listed companies. The Singapore exchange suggested inclusion of a materiality analysis, performance indicators and a board statement for a sustainability report that has been made mandatory for companies. Malaysia, a country active in the ESG space, has moved its assets in the ESG way of investment processing.
On the other hand, two large pension plans including Japan’s Government Pension Investment Fund and Korea’s National Pension Service, have made significant allocations to ESG strategies whereas Taiwan’s Bureau of Labour Funds plans to implement such a strategy later in the year.
However, the Global Sustainable Investment Alliance (GSIA), a collaboration of membership-based sustainable investment organisation, stated that Asia ranks poorly in terms of Sustainable Assets with just 0.8 percent as compared to Europe’s 58 percent of the total assets in the region. Asia’s USD53 billion, especially led by Malaysia, Hong Kong and South Korea, seems scarce with the Asia-Pacific only managing the more than 2.5 percent of the USD25 trillion assets managed under ESG worldwide.
The World Wide Fund for Nature (WWF) in 2015 urged the South East Asian countries to do more with respect to ESG standards especially as banks can leverage it to make robust credit risk management, lessen reputational risks and create new financial products.
While there are naysayers who feel that laying too much stress on non-economic metrics can impact performance, ESG, as a type of “sustainable investing,” has now been proven by a vast majority of studies to be a positive force. Simply put, ESG norms lay importance on positive returns along with considering long-term impact that business practices have on society, the environment and the performance of the business itself.
Environmental factors can include Carbon emissions, climate change risks, supply chain management, waste and recycling, water management and energy usage. The social factors may take into account community relations, diversity issues, employee relations, health and safety along with product responsibility. Governance has a host of criteria like board structure, shareholder rights, voting processes, executive compensation and shareholder rights.
Some of the main reasons for slow ESG adoption include lack of strong ESG data. This entails the need to develop rigorous analytics, which will assist decision-making processes, strengthen risk management practices, along with demonstrating long-term performance benefits. In addition, companies will need to recruit talent with the right skills and hence ESG factors need to be integrated into investment decision-making from the start.
In the US, it is estimated that of USD40.3 trillion total assets under professional management in 2016, about USD8.1 trillion is invested in ESG portfolios. It grew by 30 percent from USD6.57 trillion in 2014 indicating fund managers are optimistic…
The United Nations-supported Principles for Responsible Investment (PRI) network was established a decade ago. It suggests ways for investors to balance ESG concerns with monetary ones. The UN claims that firms operating in an ethical manner, lowering inequality and improving citizens’ health generate better long-term returns. However, the UN’s report in 2016, ‘Investor Obligations and Duties in 6 Asian Markets’, Singapore, South Korea, India, China, Hong Kong and Malaysia — said that the countries had not integrated ESG considerations into their financial decision-making process.
The UN framework has around 700 investment managers and more than 250 asset owners around the world, including the likes of Blackrock, KKR, Fidelity, being on board. Its principles detailing the best practice for ESG have gained 1,500 signatories, from over 50 countries, representing US$60 trillion.
China’s adoption of mandatory ESG disclosures will have a vital impact on the region as the country did not even consider ESG issues five years back. India’s oldest stock exchange, BSE and the International Finance Corporation, a part of the World Bank, launched the corporate governance scorecard in December 2016 that aims to help companies improve their governance performance against national or international-benchmarked practices.
Among Indian companies, technology giants such as Wipro, Infosys, Tech Mahindra and HCL Technologies score well while other big players such as L&T; Ambuja Cements and Hindustan Unilever were ranked in the top 10 according to a Morningstar Sustainability Index (The index examines environmental performance of companies.
Arabesque Partners, an asset management firm, offers a unique approach of ‘quantitative approaches to sustainable investing’. Based on ESG metrics, it examines 1,000 quality stocks out of 77,000 listed firms world-wide. The firm’s two funds, Prime and Systematic, which since their launch in August 2014 have outperformed the benchmark of the MSCI All Country World Index.
A University of Oxford study combining the findings of 200 empirical ESG studies suggested that companies with strong sustainability practices show better performance along with positive results over time. Additionally, it stated that good sustainability practices have positive influence on investment performance.
The UN Sustainable Stock Exchanges initiative now has 60 exchanges representing 70 per cent of all listed equities, demonstrating a global movement and the rapid rise of non-traditional financial issues in valuation. Stock exchanges like Sri Lanka, Malaysia, South Korea, Vietnam, Thailand have become members of the United Nations-backed Sustainable Stock Exchanges Initiative, by committing to promote long-term sustainable investment and improve ESG disclosure and performance of listed firms.
The Channel NewsAsia Sustainability Ranking, a multi-year initiative led by three partners including CSR Asia, Channel NewsAsia and Sustainanalytics, identifies regional leaders in Corporate Sustainability. The 2016 results saw Wipro from India; City Developments from Singapore and Lite-On Technology Corp from Taiwan as ESG out-performers.
It is interesting to note, that the world’s largest economy, China, did not have even a single company feature in the top 20. The list is dominated by Taiwanese and Japanese companies clearly indicating that other economies are far behind despite their stellar growth. Such endeavours launched by a media network and encouraged by good partners can go a long way in spreading the word further among the public and investors on the necessity of genuine ESG in business.