The way forward for ESG in Asia
The pace of ESG adoption in Asia remains steady but attitudes are changing
11 Mar 2019 | Aaron Leung
chief investment officer
Hong Kong and Asia
sustainability & ESG advisory Business Environment Council
chief investment officer, Asia Pacific
BNP Paribas Asset Management
director, group sustainability CLP Power Hong Kong
Asia investment strategist
HSBC Private Banking
head of sustainable development
chief executive officer, Hong Kong and chief investment officer,
Asia Pacific, Lombard Odier
head of advocacy and engagement
Sustainable Finance Initiative
head of Asia, ex-China and Japan global networks & outreach
As environmental, social and governance (ESG) considerations move increasingly into the mainstream of investment, corporations in Asia are waking up to the opportunities of committing to ESG-focused principles.
Communication is integral in the ongoing engagement with asset owners and investors. Companies are becoming more open to dialogues on sustainability as asset owners drive further engagement with investee companies on ESG. With the aim of creating shareholder value, ESG engagement is helping transform companies.
“We support the concept of long-term (ESG) engagement. On the one hand, it helps to understand where we are making progress, while identifying those areas that need more focus, or where our performance can be improved,” says Mark Watson, head of sustainable development at Swire Pacific.
“On the other hand, we are able to explain to investors what we are planning in the long term and where we intend to go in terms of our sustainable development objectives. ESG engagement gives us a much better picture of progress and performance and we believe it has value for both investors and ourselves,” he adds. Hong Kong conglomerate Swire was the first property developer in the city to sell green bonds, with its US$500 million, 10-year debt issuance in 2018.
Companies are realizing that securing a strong ESG performance over time will mean avoiding problems and incidents connected to sustainability risks. This should ultimately create a competitive advantage, both by reducing or avoiding costs relating to issues on environment, social responsibility and governance. Going forward, this should reduce the risk premium investors apply to a company’s cost of capital.
“The management of ESG issues is a critical part of risk management – both for investors, particularly if their investment horizon is beyond the short term, and for corporates, which ultimately have to deal with changing social and environmental circumstances at an operational level,” says Hendrik Rosenthal, director of group sustainability at CLP Group.
The utility group’s Indian subsidiary was the first from South Asia’s power sector to raise funds through a green bond issuance.
“To help manage the risks, CLP has set out our decarbonization targets leading up to 2050 and has been working to ensure an orderly transition to a low-carbon future. This is no easy task and we take it seriously as the transition is not only affected by regulatory and environmental factors, but also by our commitment to supply the communities where we operate with a stable and safe supply of energy at an affordable price,” he adds.
Environmental pressures are becoming more critical and social issues are evolving. Companies are constantly faced with the challenge of responding to problems that can impact short-term performance, while looking far into the future to address concerns such as changing climate and demographics.
Investors are in search of companies that are forward-looking, resilient and demonstrate vigilance in responding to current challenges.
“We have analysts making judgement on ESG standards on the corporates. We have both pure financial status metrics and pure sustainability evaluation metrics in our report and the weighting of the two are considered equally important,” says Jean-Louis Nakamura, chief executive officer for Asia Pacific at Lombard Odier.
Institutional investors, through their sustainability mandates, have been instrumental in accelerating the adoption of ESG practices among Asian corporates.
“We reached that realization that it (ESG consideration) comes naturally to the core of our business considering the nature of our long-term investment,” says Boris Moutier, regional chief investment officer for Hong Kong and Asia at AXA.
Researchers continue to explore the relationships between ESG performance and corporate financial performance. Several studies support the conclusion that sustainable investing and investment returns are positively linked. While there is ample evidence that sustainable investing is not hurting portfolios, there remains a number of non-believers.
“Although we have done a lot of education and awareness-raising, people would misunderstand that making ESG investment is to sacrifice returns. This has limited the investible universe to certain asset classes,” says James Robertson, head of Asia ex-China and Japan at PRI.
Alex Ng, chief investment officer for Asia Pacific at BNP Paribas Asset Management, believes excellent ESG standards can function as a guide to a company’s overall quality of management and long-term sustainability. ESG factors, in particular, have a positive impact on financial returns. Unfortunately, not everyone is convinced.
“There is still not a holistic view that you can do good and do well at the same time,” says Ng.
“Many people still feel that investing with an ESG approach could negatively impact performance. They would rather focus only on maximizing return for their investment portfolio, and do philanthropy separately,” he adds.
However, as sustainable investing continues to gain traction, the distinction between philanthropy and impact investing is slowly becoming less defined. Investors can look across various assets and see investment opportunities that offer social benefits, promoting values that philanthropy supports.
Tze-wei Ng, head of advocacy and engagement at Sustainable Finance Initiative (SFI), believes philanthropy is much more than charity; institutions and individuals that support philanthropy have roles to play in sustainable investing. SFI, a community platform that promotes sustainable finance, is backed by the Hong Kong-based family office RS Group.
“Coming from a more philanthropy perspective, some ask how they can be more effective in philanthropy by considering impact investing. Others are thinking how they can better align investment with their values,” says Tze-wei. Tze-wei reveals that while high-net-worth donors continue to drive social investing, she believes the future of sustainable investing rests with millennials.
Patrick Ho, Asia investment strategist at HSBC Private Banking, agrees. “There is more demand (for ESG investment) from the millennials – the younger clients. Ninety percent of them are still learning and finding their optimal solution for their own families,” says Ho.
Challenges with resource usage, regulation, and climate change are likely to keep ESG issues on the front burner for some time to come. But corporations are also facing an uphill battle within their organizations.
Sustainability issues are little understood by the company’s finance teams. Nadira Lamrad, assistant director for sustainability and ESG advisory at the Business Environment Council, says that “within the organization, there is a gap in understanding between the finance and the sustainability teams and it is hard to bridge the gap.”
Lamrad points to the emergence of new frameworks such as the recommendations of the Task Force on Climate-related Financial Disclosures as a positive step in bridging this gap, giving the finance function and sustainability practitioners a common language and outlook on ESG issues.
Watson believes sustainable development teams should make an effort to “speak the language” of the corporate finance team to understand what motivates them and how ESG can add value.
“Through this long-term engagement process, we look to continually build the credibility of the sustainability team, ensuring that ESG factors are effectively integrated into our business strategy and operations,” adds Watson.
Treasury Review 2020