In this issue: ESG performance hasn’t been a safe haven for bank investors in the wake of Credit Suisse’s collapse. On ESG metrics in executive pay, Asia might not be as progressive as the headline numbers suggest.

Singapore

Green or not, it’s all red for banks

The collapse of Credit Suisse has sent a shockwave of fear throughout the financial sector, and bank stocks have taken a beating.

Markets in crises can be ruthless; investors will abandon the weak and flock to the strong. ESG proponents often argue that companies that pay attention to extra-financial factors are more resilient, so should we expect banks with stronger ESG performances to outperform their less holistic counterparts?

It’s still early days, but a very crude look at the initial market reaction to the Credit Suisse crisis suggests ESG factors haven’t had a meaningful impact on investors’ decisions so far. Among the 10 largest constituents of the MSCI World Banks Index, Wells Fargo’s ESG score by S&P Global was the worst while BNP’s was the best. Yet, both banks’ share prices have been among the worst hit over the past two weeks.

Among the Singapore banks, DBS had the best ESG score, but its share price has not held up as well as that of UOB, which has a slightly lower ESG score. Of course, Credit Suisse’s ESG score – as at 2021 – was a middle-of-the-road 54 out of 100, which is kind of a lesson in not putting too much weight on ESG ratings.

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This is in no way a statistically rigorous analysis, but it does suggest that the value of ESG performance in a crisis can be complicated.

It definitely doesn’t mean that ESG performance is meaningless to businesses. A strong ESG foundation won’t eliminate unforeseen circumstances for a business, but it should help to bounce back from them. It might therefore be more meaningful to assess how well ESG performance affects a bank’s ability to respond and recover from this crisis, and that is something that can only be done with a generous amount of hindsight.

It’s also important to remember that ESG is only one of many aspects of a well-run business. A company could be very adept at fulfilling an ESG rating firm’s criteria, for instance, but still have a lousy business strategy.

The longer-term trend appears supportive of ESG outperformers, however. A 2020 look at the impact of the Covid-19 pandemic found that flows into ESG funds continued to grow during that crisis. A majority of large-cap ESG funds also outperformed the MSCI World Index during that period.

Other Singapore reads

• Climate Impact X to feature heavily curated basket of nature-based projects for a start

• African carbon project hit by ‘blood carbon’ allegations; Singapore’s carbon marketplace assessing situation

South-east Asia

Exec pay in region still greener on the other side

A study by WTW found that almost two-thirds – 63 per cent – of surveyed companies in the Asia-Pacific incorporate ESG metrics in their executive compensation plans. A closer look suggests the truth on the ground isn’t as shiny as the headline number would make it seem.

For a start, Asia-Pacific companies are lagging the rest of the world. The global positive rate for ESG metrics is 75 per cent.

WTW’s definition of ESG metrics might also be a bit lenient. A good 37 per cent of the respondents – or about half of those that had incorporated ESG – had what WTW defines as “People and HR” metrics. These metrics measure factors related to leadership, succession management, training and development, and employee engagement. While these are all legitimate and important aspects, they are also quite common and might not be a strong indicator that a company is considering ESG more holistically.

Looking at just environmental metrics, 28 per cent of Asia-Pac companies incorporated them into their compensation plans – compared with 38 per cent globally. Governance metrics were used by 31 per cent of the region’s companies, compared with 42 per cent globally. Only 17 per cent of regional companies used diversity and inclusion metrics (It’s zero in Singapore!), much less than the global rate of 40 per cent.

A widely held belief in the field of ESG is that what gets measured gets done. Critics are understandably sceptical when companies make claims about being progressive on ESG matters but don’t hold their executives accountable for progress.

It’s clear that the region still has some way to go.

Other South-east Asia reads

• Critics, experts in demand for sustainability panels

• Technology-based carbon credits clear at RM18.50 at Bursa Malaysia’s inaugural auction; nature-based ones fetch RM68

Other good reads

• UK financial watchdog slams poor disclosures by ESG benchmark compilers

• Solutions ranked in UN’s ‘how-to guide to defuse the climate time-bomb’