Sustainable investing in Asia is growing along with the need for better communication to boards
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Environmental, social and governance (ESG) reporting is growing across the 10 member countries in the Association of Southeast Asian Nations (ASEAN). Indonesia, Malaysia, Philippines, Singapore and Thailand require listed companies to make ESG disclosures, while reporting remains voluntary in Brunei, Cambodia, Laos, Myanmar and Vietnam.
But while a growing number of companies are issuing ESG reports, some still see it as ‘a box-ticking exercise; they focus more on meeting the disclosure requirements than thinking thoroughly about what ESG means to their businesses’, says Herbert Yung, risk advisory director at Deloitte China.
‘Many consumers are now more aware of companies’ ESG performance, and they tend to prefer companies that can better demonstrate responsibility to the environment, employees and the wider community, and make their purchase decisions accordingly,’ says Yung.
‘Investors have also paid more attention to ESG as they recognise it has become a key risk factor and opportunity driver for companies. Given rapidly changing climate conditions and tightening environmental regulations, this could significantly affect both the reputation and operation of companies. This will affect long-term investment returns.’
Naina Batra, chairperson and CEO of the Singapore-based Asian Venture Philanthropy Network, notes that ESG-based investments are growing and despite promising developments, many challenges remain in Asia.
‘First, the combination of limited knowledge, misconceptions about ESG hampering financial performance and a skill resource gap have made ESG less attractive for some investors,’ she says.
Nonetheless, she feels it has become increasingly clear that sustainable investing is no longer just an option; it’s an imperative.
‘Government agencies are stepping up and becoming increasingly interested in encouraging the move to sustainable finance, and have begun taking action to facilitate ESG growth,’ Batra says.
‘Fast-growing sectors are also gaining traction among investors when it comes to ESG investing. These sectors include energy – particularly solutions addressing pollution – and communications technology.’
In view of the concerns, more companies have started to leverage ESG reports as a tool to articulate their efforts and performance while staying competitive. The Covid-19 pandemic may have also induced a shift.
‘Companies are being evaluated based on their responses to the pandemic as a measure of their stability, resilience and adaptability,’ says Yung. ‘Therefore, they may want to demonstrate how they protect their business and people.’
Yung notes that the public has also developed expectations that companies should play a greater role, with many sourcing or manufacturing personal protective equipment, making donations and volunteering.
Companies may need to articulate these efforts in their ESG reports. But this is no easy task.
Understand the language
Up until now, ‘the discussion and language about ESG have been corporate social responsibility-centric, and around subjects such as carbon footprint, which are not necessarily topics boards understand’, says Pat Woo, a partner and head of sustainable finance at KPMG in Hong Kong.
‘If the language were moved into capital and cost of capital, it’s something that resonates with the board.
‘Irrespective of Covid-19, the ESG train has already left the station. Every aspect of capital deployment is focusing on this.’
Build an ecosystem
Batra notes that while the creation of new investment vehicles and increasing flow of capital to investment-ready vehicles is moving rapidly, more still needs to be done, including creating the hubs to develop innovative investment vehicles, researching market gaps, and providing risk-mitigation capital to attract financing from mainstream investors.
To achieve this, organisations should take an ecosystem-building approach. Foundations and philanthropic organisations can, Batra suggests, act as critical catalysts.
‘Governments must work alongside regulatory agencies, who need to adopt a carrot-and-stick approach to make sure listed companies also report on ESG metrics,’ Batra says, adding that more also needs to be done to educate financial advisers.
Meanwhile, Woo sees ESG as being instrumental in helping ASEAN capture sustainable finance capital.
‘It’s also a natural fit for ASEAN governments to focus on ESG simply because, from a climate change and social impact perspective, many of these are developing countries and have the most to lose, and the governments are going to need the private sector to get involved as they can’t afford to cover it all by themselves,’ he says.
‘Asset managers in ASEAN are beginning to move in this direction, and growth potential is huge. That trajectory is ready and coming, so you’d want to be in front of the queue to capture this opportunity.’
CPD technical article
"The discussion and language about ESG have been corporate social responsibility-centric, and around subjects such as carbon footprint, which are not necessarily topics boards understand"