ESG Matters – The Smarter Investment In Our Future

These past few months have forced fund managers, like everyone else, to become more flexible while waiting for life to get back to normal. Luckily, technology allows me to work from home with minimum disruption. I can mirror my office desktop on my home computer to securely access work programmes and files. I can easily talk to company executives via widely-used video conferencing apps.

My job is to analyse corporate governance (G) issues at Asian companies. Governance, along with ‘environmental’ (E) and ‘social’ (S) factors, make up the ESG trinity. ESG, and responsible investing, have become hot topics in recent years. This will become even more so as the coronavirus pandemic forces us to rethink our priorities when pursuing economic growth.

As governments around the world pledge trillions of dollars to support businesses and save jobs, this presents a one-in-a-million opportunity to make a substantial commitment towards a sustainable future. One thing I have learned during this time is that sustainability and resilience are often synonymous.

Progress in Asia on ESG

Asia’s record on ESG matters is mixed. After decades of rapid growth, the world’s 10 most polluted cities are located within this region. Labour conditions can be appalling. Corporate governance standards, while improving, tend to lag global best practice.

Having said this, there are many signs that things are getting better. Here are a few from my travels – in person and online:

In recent years the region’s investors – asset owners and asset managers – have shown more of an interest in responsible investing. This will put more pressure on companies to change bad behaviour.

For example, Japan’s Government Pension Investment Fund, one of the largest pension funds in the world, announced in 2017 its plan to increase allocations in responsible investments to 10% from 3%. The targeted amount is equivalent to some US$33 billion today.

Fund managers are signing up to internationally recognised agreements, such as the United Nations Principles for Responsible Investment (PRI), to demonstrate their commitment to sustainability tenets. In China and the ‘rest of Asia’, the number of net new PRI signatories grew 64% and 17% during 2018/2019, compared to a year earlier. In Japan and Australasia, gains were 12.5% and 8% respectively. Combined, net new signatories in all these markets rose by 339.

Regulators are also doing their part. The Singapore Exchange introduced sustainability reporting for listed companies on a ‘comply or explain’ basis in 2016. Hong Kong Exchanges and Clearing is implementing the recommendations from a consultation paper designed to strengthen ESG rules. Policymakers in Thailand are driving changes that have made Thai companies among the region’s best for sustainability disclosure.

Regional industry groups, such as the Asian Corporate Governance Association, provide platforms for stakeholder conversations on responsible investing via conferences and other events.

As a result, Asian companies have become more fluent in the language of ESG, demonstrating evidence of ESG considerations within business strategies and adopting more robust governance practices.

There is still room for improvement, of course. For instance, there is insufficient transparency around materiality assessment – identifying the ESG factors that affect business performance. There is confusion over disclosure of relevant ESG-related data. Lack of reliable data remains a problem.

As I write this, Singapore (where I am based) has relaxed some of the restrictions put in place to combat the spread of the coronavirus. A few countries within this region are also taking the first tentative steps towards normality.

Significant ESG challenges remain

But this cannot mean that it’s ‘business as usual’. Everyone has to think carefully about the sort of future they want. Even when the coronavirus is beaten, the world still faces significant challenges.

For example, climate change poses an even greater long-term threat than Covid-19. Many people around the world would have seen, or experienced, the effects of rising temperatures. Societies are already counting the human and financial costs of higher sea levels and extreme weather events.

Social inequality – the growing gap between the world’s haves and have-nots – is another major challenge. Inequality has led to widespread anger that, in some cases, has unleashed social and political upheaval.

The world is also consuming resources at an unprecedented rate. People are depleting the world’s natural resources which cannot be easily replaced, if these resources can be replaced at all.

The role of ESG investments

Investors everywhere have an important role to play in finding answers. We can help direct investments towards companies that are working on sustainable solutions, or engage with companies to help change bad corporate behaviour.

Recalcitrant firms that persist with carbon-heavy activities, that exploit their workers, or damage the environment, can be penalised by having their access to capital revoked.

Even if our work and personal lives won’t feel completely ‘normal’ for some time, we mustn’t allow this sense of suspended reality delay those important decisions that will have profound effects on the world.

Finding solutions will generate new investment opportunities. However, our generation also has a huge responsibility to all those that follow us. We cannot let them down.