A rapid change in investment trends is unfolding in Asia as governments, regulators and investors sharpen their focus on climate change and corporate governance. Jenn-Hui Tan, Fidelity International’s Global Head of Stewardship and Sustainable Investing; Yuanlin Lang, Senior Equity Analyst & Portfolio Manager; and Tina Chang, Associate Director, Sustainable Investing, assess the embedding of environmental, social and governance (ESG) factors and explore the near-term outlook for sustainable investing in Asia’s diverse markets.
Even though Asia ex-Japan still accounts for around 4 per cent of global ESG assets under management (AUM) , the region has taken significant strides in ESG adoption over the past few years. According to a recent survey of Fidelity’s analysts, 70 per cent see a growing emphasis on communicating ESG policies among Asian corporates. That’s on par with the global average and slightly ahead of North America, with a good deal of that momentum driven by regulation.
“It’s not particularly well-appreciated that the amount of ESG regulation in Asia has doubled since 2016, matching the output of European regulators,” says Tan. Much of this is driven by entity-level reporting of products and services, activity-level reporting and due-diligence requirements.
The journey towards full disclosure
In terms of disclosure, the landscape is improving rapidly. “Five years ago, a minority of the companies I cover published annual ESG reports; now most do,” notes Lang.
But while companies are disclosing more information in areas like energy consumption, greenhouse-gas emissions and hazardous waste treatment, many are either not setting improvement targets, or issuing targets with inconsistent metrics, making comparative analysis difficult.
Equally, it remains challenging for businesses to establish the type of information investors require on social issues. “Based on our conversations with companies, they have multiple guidelines and internal policies on compliance training, responsible marketing, diversity and inclusion, but they are trying to establish what is relevant for investors,” adds Lang.
Accelerating ESG adoption in China
Fidelity recently conducted a study of around 260 executives in China to gauge ESG adoption. The results show that it is gathering pace. Almost two-thirds of companies surveyed already publish annual ESG reports, and 29 per cent plan to do so within three years.
On one level, this acceleration is being propelled by regulatory requirements, particularly among China’s state-owned enterprises (SOEs). However, the study also found that the top two drivers of action on ESG were customer and investor demand, both global and domestic, indicating that the mindset of Chinese investors is shifting as expectations grow for companies to be more socially responsible.
Challenges remain. The largest of which is the collection and deployment of data. “It's tough at the moment to gather all the data required for ESG disclosure, though that is something firms are looking to tackle in the next 12 months,” says Chang, “Although disclosure and ESG strategies are maturing, they’re not using international frameworks yet, so it’s still tricky for stakeholders to process the data and make a global comparison.
“At the same time, it’s an opportunity for analysts to explore the detail and make our own judgments, given companies aren’t disclosing it in a way that third-party providers can digest.”
An uneven regulatory backdrop
Unlike in Europe, there is no unifying set of regulations across Asia. “We still lack consistency in the region, with each regulator taking their own approach,” explains Tan. “When you aggregate those and combine them with the rules in Europe and the US, it creates a patchwork environment that we have to navigate.”
Despite this, individual Asian markets are progressing towards a broadly aligned set of standards, albeit at different speeds. “There are common themes to the regulations,” Tan continues. “If you think about the rules that have emerged, you have agreed taxonomies, climate reporting that is generally aligned to the TCFD (Task Force on Climate-Related Financial Disclosures), growing carbon pricing, supply chain due diligence requirements, corporate ESG disclosures and ESG fund-labelling requirements.”
The push for more robust governance
Chang notes that the trend towards governance enhancement is not as prominent or well-known as these regulatory developments.
In China, the Securities Regulatory Commission recently launched a consultation on the role of independent directors, clarifying their positions and strengthening their accountability and influence on corporate boards. There’s also a push to improve capital allocation at SOEs, which is a crucial part of the governance pillar. “It may not be a huge change, but we will see the situation develop in China. There’s also growing investor activism in markets such as South Korea,” says Chang. These developments are particularly valuable to investors in Asia.
Overall, the fundamental bottom-up analysis of ESG risks and opportunities is still emerging in Asia. However, this presents an opportunity for investors with an on-the-ground presence to develop unique first-hand insights.
Source
1: Bloomberg
