Sustainable Investing as a Driver for Change in Asia
Since the global financial crisis, many investors have woken up to the fact that looking at financial data in isolation does not in itself provide a clear picture about whether or not a particular company represents a sound investment opportunity. Increasingly, investors have become aware that how organisations deal with issues such as climate change, employee engagement and tax planning are equally important considerations in the investment decision making process.
In the 10 years since the PRI was founded, we have seen considerable interest in environmental, social and governance (ESG) issues spreading across Asia. This is not surprising when you consider that the region is subject to impacts from myriad environmental issues such as climate change and water scarcity. Asian investors have also realised—along with their western counterparts—that they need to demand greater transparency and disclosure from the companies in which they invest.
Skepticism about the financial impact of complying with ESG standards still exists. The biggest question is, will looking at ESG negatively impact capital returns. The answer to this question is a resounding no. On the contrary, a holistic approach which considers ESG factors in tandem with financial data can enhances returns over the long term.
This was borne out by a study conducted in December 2015 by the University of Hamburg and Deutsche Asset & Wealth Management, the largest of its kind to analyse the relationship between ESG adherence and corporate financial performance, concluded that companies prioritising ESG have superior long-term financial returns. Additional studies by Oxford University/Arabesque Asset Management, Harvard, MSCI and others echo these findings.
Although just 5% of the PRI’s signatories are based in Asia, we believe this will change as ESG awareness continues to increase across the region. Asset managers, pension funds, insurance companies and banks will be asking questions about ESG before committing to investing.
In September, during the PRI’s annual conference, PRI in Person, the world’s largest responsible investment conference, which this year takes place in Singapore, the PRI will be releasing a paper focusing on fiduciary duty in Asia, looking at China (including Hong Kong), South Korea, India, Malaysia and Singapore. These five countries represent 36% of the world’s population and have a combined GDP of $14.5 trillion. There is also significant growth in pension fund investments in each of these countries.
This publication follows on from the paper we released last year, “Fiduciary Duty in the 21st Century, which concluded that failing to consider all long-term investment value drivers, including ESG issues is actually a breach of fiduciary duty.
In terms of responsible investment and ESG focus, there are many drivers for change across Asia. One of the most significant is by the Hong Kong Stock Exchange (HKEX), which, from next year, will require listed companies in Hong Kong to make mandatory public disclosures about company policies and how they intend to deal with the operational risks that have far-reaching implications for the environment and the wider society. Firms will need to make ESG disclosures on measurable key performance indicators like targets and achievements with explanations required if these disclosures are not met. On the environmental front, aspects covered include emissions and use of resources, while social issues comprise employment, health and safety, training and development, labour standards, supply chain management, product responsibility, anti-corruption and community investment. According to HKEX and findings from index compilers, share prices of companies that score high on ESG issues often outperforms the wider stock market.
The importance of stewardship codes has also been increasing, with Japan leading the way. Malaysia launched its Code for Institutional Investors in 2014, while Taiwan, Hong Kong, Singapore, and South Korea are having talks to develop their own stewardship guidance.
Finally, stock exchanges including those in India, 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.
As ESG considerations become mainstream for companies looking at long-term strategies; and as governments in Asia continue strengthening their regulatory mechanisms, investors will come to realise that a holistic approach to risk management and investing must include a focus on ESG.