Barely a week goes by that the global ESG community doesn’t have something tangible to crow about. Even when the news is apparently negative, such as the withdrawal of the United States from the 2015 Paris climate change agreement, no matter: ESG wonks can at least claim the moral high ground as they throw their arms in the air at President Trump’s crassness.
But even if The Donald hasn’t got the joke yet – at least as far as the Environmental element of ESG is concerned (he’s probably morally incontinent on the Social and Governance components too) – everybody else is, and rapidly.
It’s happening apace in Asia, a region which traditionally, with the exception of Japan, hasn’t given a fig about ESG, or all the notions which come with it, such as fiduciary duty to shareholders, even of the minority kind, gender equality or environmental concern. The Asian economic miracle didn’t happen because of ESG considerations, thank you very much.
ALL THAT HAS changed remarkably over the past decade or so. The landscape remains highly fragmented, with countries in Asia varying widely as to whether ESG reporting by companies is done on a mandatory, voluntary or somewhere-in-between basis. But, over that period, a host of milestones have been passed.
Japan instituted an emissions trading system as long ago as 2005 and complemented this with environmental reporting guidelines a few years later, while a voluntary stewardship code was introduced in 2014. The gloves came off in 2015 with a mandatory corporate governance code.
China went mandatory a bit earlier and more extensively, producing mandatory CSR guidelines for the country’s state-owned enterprises in 2008, with compulsory production of an annual CSR report, and greenhouse gas reporting for all Chinese corporates emerging over the past five years.
Other countries have gradually caught up. India ranks number three in Asia behind Japan and China in the number of companies complying with ESG reporting guidelines (as of 2015), with South Korea, Taiwan and Hong Kong in the middle and Malaysia and Singapore lagging.
These “league tables” are not statistically adjusted for a country’s size, however, and are somewhat skewed. In the meantime, the ratification of the Paris climate agreement has added a sense of urgency to environmental reporting, principally in the emission of greenhouse gases, so those league tables are set to jump around.
But the ESG impetus in Asia is not being primarily driven by regional authorities, even though it helps, as a money manager, with explaining your asset allocation if you come up with portfolios according to your assessment of a country’s regulatory reputation.
No, it’s coming from the asset managers, and to a lesser extent from the companies they invest in. HSBC Global Asset Management neatly personifies this emerging dynamic among money managers. It is planning to launch ESG-aligned funds in Asia this year and now encourages the companies in which it has existing holdings to include ESG in their investment decisions.
It might be that in a world where asset managers struggle to differentiate in the face of minuscule interest rates and moribund global economic growth, ESG is a marketing man’s dream.
No longer is it all about rates of return – although ESG has been proven to contribute to outperformance versus a benchmark index – but increasingly it is about meaning, altruism, future generations and all that jazz. And the short-termism, family-owner hegemony and shabby treatment of minority shareholders which had long been Asia’s style is on the way out.
DIVESTMENT IS ONE “strategy” which asset managers can use to persuade the corporate universe to pay heed to ESG, although for companies which sit firmly in the fossil fuel industry, it’s probably a bit late, unless they engage in radical divestment of their own and embark on a full-scale corporate reinvention.
The Norwegian state pension fund announced with great fanfare its coal divestment programme last year, as did France’s AXA. “So what?” some board members in the “brown” industries may opine, since the divestment of any single fund rarely inflicts terminal damage on its own. Still, it creates an ambiance which anyone with an eye on the long term should ignore at their peril.
Shareholders of ExxonMobil recently approved a resolution which called on the company to do more to tackle climate change. The board of directors, however, disapproved it, apparently failing to recognise the ambiance that ESG increasingly brings to corporate proceedings.
They might perhaps act upon it more readily if failure impacted the cost of equity or long-term debt. Indeed those in the brown industries look at proceedings in the Green bond market with awe and jealousy. The emerging pricing advantage of Green over conventional debt will help transform the ambiance around ESG into something tangible, and inescapable.
