Asia needs ESG to boost longer-term GDP growth: report

FOCUSING on green investments could stimulate economic growth in Asia, although there is a need to further improve the standardisation of data, a Deutsche Bank CIO report has suggested.

The report cited an Oxford University study, which found a statistically significant relationship between a firm's performance in environmental, social and corporate governance (ESG) and a country's living standards, as measured by gross domestic product (GDP) per capita.

For example, if Indonesian firms were to improve their environmental performance to reach the level of the highest performers in the dataset, this would be associated with an increase in GDP per capita by 15 per cent, from roughly US$4,300 to US$4,900.

"The study suggests that if a portion of the pandemic recovery efforts were directed at enhancing companies' ESG practices and especially social performance this could also stimulate economic growth, all things remaining equal," the report said.

Deutsche noted that some economies in the region already accept this. For example, Singapore recently launched a Green Plan 2030, where sustainable living, energy reset and the green economy are seen as integral pillars to its economic growth and climate and resource resilience.

At the same time, the shift to sustainable investments is boosted by four other factors, said the report.

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Social and economic interest in ESG has encouraged investors and asset managers to incorporate ESG into investment decisions.

A 2019 survey has also showed that the majority of millennials, who are expected to hold about 35 per cent of Asia's wealth by 2025, believe they can influence climate change and lift people out of poverty through their investment decisions.

Regional integration through agreements like the Regional Comprehensive Economic Partnership (RCEP) could create major opportunities in the form of enhanced regulation and new anti-monopoly measures to boost fair competition.

Digitalisation and data analytics could also help solve existing problems around ESG assessments, identify sustainable enterprises and correlate ESG with financial performance.

Despite the tremendous opportunities in Asia, there are a number of challenges, the report said.

One is the highly diverse nature of the region with varying income levels and types of governments.

"Standardising ESG standards with a coordinated methodology and taxonomy may thus prove to be more difficult than in Europe or the US," the report said.

But the use of artificial intelligence and digitalisation could help with deficiencies in the quality of existing ESG data, said the report.

Meanwhile, governments are starting to align with market standards, Deutsche said. It noted that the People's Bank of China consulted the market on updating its 2020 Green Bond Endorsed Project Catalogue, and this is taking place against the backdrop of a rising number of green bonds and social bonds, due in part to the Covid-19 pandemic.

Asia is also implementing ESG investment at a time when most economies in the region are still growing rapidly and have a significant focus on heavy industry. However, Asia is leveraging on its research and development capabilities to deal with rising sea levels, securing its fresh water supply and raise its fish production.

Another opportunity comes from the high-tech base of many Asian economies, which can drive sustainability in the energy and infrastructure sectors.