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The rise of sustainable investment in Asia Pacific – good stewardship is key

Global views and trends

Gabriel WILSON OTTO
 

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This article is intended for Institutional Investors (as defined in the Securities and Futures Act, Chapter 289 of Singapore) only and is not suitable or intended for persons who do not qualify as such.

Despite a major step-up in sustainable investment in Asia Pacific, there are considerable variations in standards between countries. Close engagement and stewardship can lead to real improvement where needed.

Over the last five years, there has been a step change in the focus on sustainable investment in the Asia Pacific region. Nowhere is this more evident than in Japan, where assets managed in sustainable investment strategies grew from USD 7 billion to over USD 2 180 billion between 2014 and 2019 (based on Global Sustainable Investment Alliance data).

This increased focus is being driven by a wide range of stakeholders including:

  • Governments and regulators – In Asia, seven countries have introduced stewardship codes, stock exchanges in Malaysia, Singapore, Taiwan and Hong Kong have improved environmental, social and governance (ESG) reporting requirements and China has introduced stronger environmental regulations and enforcement.
  • Companies – The response rate from Chinese companies to enquiries from MSCI on ESG data rose from below 10% in 2016 to roughly 60% in 2018 and exceeded the rate for US companies in 2018, as per MSCI data.
  • Asset managers and owners – While admittedly from a low base, Asia had the world’s fastest growth rate for signatories to the Principles for Responsible Investment in 2018.
  • Data providers – Better data disclosure and rising demand has helped ESG rating agencies increase their coverage, and has facilitated analysis, comparison and benchmarking on ESG issues.

However, we note that the level of engagement from these stakeholders and the growth of sustainable investment strategies varies significantly between different countries within the region.

 

Corporate response rate to MSCI enquiries on ESG data

Corporate response rate to MSCI enquiries on ESG data

Source: MSCI

Unintended consequences and the risk of greenwashing

The growing focus on sustainable investment practices and the use of ESG scores to evaluate corporate performance are positive developments, but have introduced a new set of challenges. Increasingly, companies have an incentive to misrepresent or exaggerate their sustainability credentials. With this in mind, it is not surprising that there is a strong relationship between company size and the length of formal corporate social responsibility (CSR) or ESG reports.

 

This means investors need to distinguish between companies that treat sustainability issues as a public relations exercise (‘greenwashing’) and companies that ‘walk the talk’, demonstrating a culture and track record of performance that reflects strong engagement with underlying ESG issues.

 

The benefits of company engagement and stewardship

In the Asia Pacific region, gaining insight into a company’s ESG performance is complicated further by low levels of data disclosure (in particular when compared to Europe) and the many different regulatory requirements and company norms in the region. As a result, investors often do not have enough reported data to effectively evaluate a company’s ESG performance relative to its peers.

 

In our view, this increases the importance of engaging directly with companies to assess their culture, performance and engagement with ESG issues. Company engagement is a critical component of BNP Paribas Asset Management’s Global Sustainability Strategy. It is used to help supplement investment analysis and positively impact the broader environmental, social and financial systems in the region.

 

Company engagement and the investment process

We highlight three main categories of engagement with companies and policymakers that can improve an investment process and drive positive change.

 

  1. Information gathering – Communicating with companies to evaluate culture, performance and engagement with key ESG risks and opportunities. This can include verification of reported data, monitoring changes in performance, or trying to fill in gaps in data disclosure. Due to the challenges outlined above, this can be particularly important in Asia Pacific.
  2. Education or influencing corporate behaviour – Engaging with a company to educate its decision-makers or positively influence its performance on key ESG issues. Examples include corporate governance best practice or improving resource intensity and emissions. We note that MSCI has identified a direct correlation between companies with improving ESG score momentum and share price outperformance.
  3. Policy development – Contributing to continuous improvement in the broader framework within which companies operate. This can be critical to driving change in Asia given the high level of state ownership in some countries and sectors. Industry associations can be effective vehicles for influencing policy outcomes.

 

The ESG issues or business strategies targeted by different asset managers’ stewardship activities can vary significantly. As outlined in our Global Sustainability Strategy, our focus areas in Asia Pacific include:

 

  • Responsible business conduct – We will engage with companies where we have concerns over possible breaches of the UN Global Compact (e.g. human rights, labour standards, bribery and corruption).
  • The three E’s – We will engage with companies to support:
    1. Energy transition – the shift away from thermal coal mining and power generation
    2. Environmental sustainability including deforestation (we are a member of the PRI Investor Working Group on Sustainable Palm Oil), water efficiency, biodiversity and plastic
    3. Equality and inclusive growth – remuneration, diversity, discrimination and labour standards.
  • Low ESG scores, governance and disclosure – We will engage with companies in our portfolios that have low ESG scores or a weak proprietary framework, poor governance practices or low levels of information disclosure to evaluate potential risks and improve company performance

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