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Environment, social, and corporate governance (ESG) practices have gained traction among various sectors in the Asia Pacific (APAC) region. While ESG integration is still relatively low in Asia when compared to Western counties, it is expected to continue to rise as more investors, both institutional and retail, look to ESG investing.
Various studies now demonstrate the advantages of ESG investing. A 2016 study by the IE Business School in Madrid examined how ESG factors relate to risk-weighted returns of an investment. The researchers discovered that companies with higher ESG integration had lower stock return volatility than other companies in their industry.
The differences in volatility were most evident in the materials, banking, technology, and energy sectors. It found the traditional market thinking that “the lower risk, the lower the return” does not apply to ESG companies. They argued that the lower risk brought about by ESG practices may actually lead to the same or even higher risk-weighted returns.
According to Asli Ascioglu, a professor of finance at Bryant University, companies with good ESG practices are better managed. Adding them to an investment portfolio could increase risk-adjusted returns, he told US News.
ESG opportunities in the APAC region
Several global trends have been fueling the recent increase in ESG investing in the APAC region. An MSCI survey showed that 57% of APAC investors expect companies to “completely” or “to a large extent” integrated ESG issues in their investment analysis and decision-making.
About 50% of these investors also take climate issues into consideration when making investment decisions. Smaller investors are more concerned with increasing regulations and market volatility. Meanwhile, institutional investors see climate risk impacting their investment process the most, followed by disruptive technologies and better ESG measurement.
En Lee, Head of Sustainable and Impact Investments in Asia at LGT pointed out that investors are looking for investments that generate positive and measurable societal outcomes. In an interview with Wholesale Banking, he mentioned that he sees compelling ESG opportunities in various sectors like renewable energy, electric mobility, healthcare, and financial inclusion.
Coporate governance factors dominant in Australia and Singapore
Compared to the Asian markets, Australia has a relatively higher focus on environmental and social issues. But the governance criteria has been considered the most crucial element of ESG integration in the country. Financial professionals in Australia almost always incorporate ESG issues into their investment process, but there is no systematic basis yet.
According to the CFA Institute, in Australia, 133 of the 135 primary listed companies report on ESG factors and almost all sectors have 100% ESG reporting coverage except for the consumer discretionary sector. Although, 100% environmental disclosure can only be found in Australia’s utilities sector.
Also in Singapore, corporate governance is the dominant factor of ESG integration. Analysts suggest, ESG factors are embedded in companies’ underlying strategies and business models. ESG factors are important considerations when evaluating long-term investment opportunities and risks, said Olivia Albrecht, head of ESG business strategy, Pimco, in an interview with Strait Times.
Singapore’s financial sector is its largest, but only around two-thirds report on ESG factors. As per the Monetary Authority of Singapore, its financial sector is likely to play a useful role in catalyzing sustainable and green finance in the region.
From 2011 to 2016, the country’s median environmental, social, and governance disclosure scores all went up. Besides this, the governance score exhibited the highest growth, with publicly-listed companies significantly improving on corporate governance. Singapore companies scored 88.3 out of 130 points on average in 2020 ASEAN Corporate Governance Scorecard (ACGS), the highest score to date.
China and Japan lag behind in international comparison
In China, there has been a significant increase in ESG investing over the last few years. Although, China’s ESG landscape level is still very low relative to the rest of the world. However, according to Chartered Financial Analyst (CFA) Institute, more and more Chinese investors are incorporating ESG investing. Meanwhile, Chinese companies also have a low understanding of ESG investing. This is, however, changing swiftly, with more companies working towards their ESG performance.
The increased ESG interest may be attributed to the demand from international investors and government policies and regulations, such as the Guidelines for Establishing a Green Financial System (GEGFS).
As per the CFA Institute, the coverage of governance disclosure in China equals the coverage of ESG overall. Further, the coverage is almost the same for social disclosure.
The utilities and energy sectors are the main adopters of environmental disclosure. Social disclosure seems to be the weak point of ESG integration in China, particularly in the communications, industrials, and materials sectors.
Also Japan lags behind internationally in ESG integration. The most prominent environmental issues in Japan are climate change. According to the CFA Institue, the country has always encouraged corporations to think beyond profits. Social concerns focus on its aging population and women’s participation in the workplace. Government issues revolve around shareowner rights and the correlation between performance and board member incentives.
Overall, ESG reporting is at 94.4% of listed Japanese companies, with the communications, energy, technology, and utilities sectors at 100%, according to CFA Institute. This is followed by the industrials sector at 98.9%, materials at 98.4% and health care at 97.7%. Consumer discretionary stands at 97.2%, and consumer staples at 95.6%.
India slow in ESG integration
ESG integration remains slow in India. This is as most of the demand for ESG products and practices predominantly comes from multilateral institutions and European investors. Domestic investors have rarely focussed on environmental and social issues in their investment analysis. They have placed more weight on governance issues, such as family ownership, succession planning, and royalty payments above dividends.
ESG reporting is at 100% for the communications, energy, and technology sectors, as per data by CFA Institute. On the other hand, health care, materials, and industrials are at the bottom with 85.2%, 84.6%, and 82.6%, respectively.
