ESG in Asia: Accelerating Momentum
Asia’s regulatory landscape continues to progress in terms of environmental, social and governance (ESG) adoption. China’s commitment to the Paris Agreement has perhaps been most emblematic of the growing momentum, with the country pledging to reduce greenhouse gas emissions and reach carbon neutrality by 2060. But many other countries—and by extension, companies—in the region are also making significant strides, driven not only by regulations but also investors’ increasing focus on ESG and its potential to impact investment performance over time.
Broadly speaking, this momentum should result in higher-quality ESG data across Asia in the coming years, which in turn will better highlight the risks and opportunities that are present across the region’s equity markets. While many companies look very well-positioned to adapt to these changes going forward, not all companies will prosper—and careful, bottom-up analysis will be key to differentiating.
Making Good Progress
Hong Kong, Singapore and Thailand are making steady progress when it comes to ESG, either by setting mandatory disclosure requirements or providing incentives for companies to do so. Hong Kong, for instance, has a clear framework in place for ESG guidelines, which requires companies to follow a “comply or explain” approach—if a company does not meet disclosure requirements, it is required to provide an explanation. The responsibility to disclose also lies with the company’s board, which, in our view, is an effective way to drive better ESG behavior. In Singapore, companies are asked to comply with local guidelines introduced by the Singapore Exchange in 2016, or explain why they do not.
Meanwhile in Thailand, regulators have taken a unique approach to ESG. The Stock Exchange of Thailand (SET) created a Thailand Sustainability Investment (THIS) list in 2015, which includes companies that meet a designated threshold across 19 ESG parameters. This list not only highlights the companies that are making progress and embracing better business practices, but also, and in doing so, makes the companies suitable for inclusion in global portfolios which invest in sustainable companies. This list has acted as a clear motivator for companies to improve disclosures, growing from 51 stocks in 2015 to 124 in 2020.1
These regulations have created an advantage for those companies that are able to adapt to Asia’s ESG agenda, while they have presented challenges for those that are less able to adapt their business models. In particular, companies that are facilitating more sustainable practices across their industry look well-positioned going forward. Hong Kong insurer AIA Group is one example. The company currently publishes a detailed ESG report and, as part of its sustainable investment philosophy, has been reducing its investments in carbon intensive sectors since 2017. Another example is the Hong Kong Stock Exchange, which recently launched a green finance framework with the aim of making sustainable financing more affordable for environmentally-aligned companies.
Picking Up the Pace
There are also countries, such as India and China, that, while not as advanced in their ESG policies, are making impressive strides today. In India, for example, disclosure requirements exist but in most cases are voluntary. Of note, however, the Securities and Exchange Board of India (SEBI) recently approved draft guidelines that will require the top 1,000 companies by market capitalization to disclose their ESG initiatives. At the same time, businesses in the country are becoming increasingly aware of how better ESG behavior can have positive benefits. We have seen this in companies like India-based Reliance Industries, which is actively trying to diversify and reduce its mix of high carbon intensive refining and petrochemical business by investing aggressively into more green businesses like digital and retail. China, meanwhile, does not have a unified set of ESG regulations in place as of yet. However, this could change as soon as this year as the China Security Regulatory Commission (CSRC) is in the process of finalizing a comprehensive list of ESG standards. While governance has been the primary focus of regulations’ thus far, China’s aforementioned carbon neutral target will also likely add momentum to the environmental component.
As regulations in some of these countries continue to ramp up in the years to come, we expect to see particular opportunities in companies that are taking concrete steps to improve their ESG practices, or in those that directly contribute to the region’s sustainable agenda—such as by offering products or services to help improve the environment or reduce carbon emissions. For example, companies that manufacture electric vehicle batteries—an industry that has been one of the primary beneficiaries of the push toward green investment globally—may be poised for growth going forward. Asian firms CATL and LG Chem are at the fore of this fast-growing, but highly concentrated sector.
Laying the Foundation
There are also a handful of countries that, while in the earlier stages of ESG adoption today, are on the right track, with regulations set to take effect in the coming years. Taiwan is one example. While ESG disclosures today are voluntary, starting in 2022 companies will be required to follow the Global Reporting Initiative standards on ESG reporting, which aim to help companies report on their sustainability in a consistent way. This suggests that the quality of disclosures in Taiwan could improve notably going forward. South Korea is in a similar position, with large listed companies required to disclose ESG data from 2025. However, ESG practices of a number of large South Korean corporations are already ahead of what local standards prescribe.
Given these upcoming regulations, companies that are already in compliance, or close to being in compliance, look well-positioned for growth. Taiwan Semiconductor Manufacturing Company is an example. The company’s governance structure, resource management and supply chain initiatives, in particular, not only meet but in some cases are ahead of both Taiwanese regulations and its global technology peers. South Korean online platform Naver is another example of a company going beyond local market regulations. It scores particularly well on governance parameters as the majority of its board is independent, and it has separate Chairman and CEO roles. In fact, we believe that these strong ESG practices, combined with the company’s solid fundamentals, are part of the reason Naver’s valuation trades at a premium.
The accelerating momentum of ESG in Asia will likely reshape the equity investment landscape for years to come, giving way to attractive opportunities across the region’s equity markets. As countries continue to adopt and improve regulations, and ESG becomes a more permanent fixture, some companies will inevitably be better positioned than others. In our view, it takes careful, bottom-up stock selection to identify those set to benefit from this transition—and also to avoid those companies that may see a bigger threat to their business model. At Barings, ESG is integrated into every step of our investment process, as we believe it allows us to better assess the risks and opportunities that may not be apparent in traditional fundamental analysis. We also engage with company management teams to improve sustainability related disclosure and advocate for better practices, further contributing to Asia’s accelerating ESG momentum.
1. Source: Stock Exchange of Thailand. As of December 2020.