ESG is Asia's opportunity, but can we seize it?
INVESTMENTS in environmental, social, and corporate governance (ESG) concerns have been touted as a much-needed shot in the arm for Asia's economies, after the ravages wrought by the pandemic. For such investments to fulfil their potential, however, the companies making them will have to effectively communicate their impact to shareholders.
At present, the quality of the disclosures by companies leaves much to be desired. And therein lies what is arguably going to be the greatest concern when it comes to the growth of ESG investing: the level of transparency and comparability of corporate ESG disclosures in an ecosystem currently lacking even a common language.
An analytic survey by Global ESG Monitor (GEM) out recently looked at the ESG disclosures of 140 companies, predominantly those in Europe - a region that has led the world when it comes to interest in ESG investments.
It found that only about one-quarter of the reports provided any methodology, and even fewer cited formulas, approaches or calculation methods for their ESG data. And only a third demonstrated transparency when it came to ESG objectives that had not been met.
GEM also noted that there are no standardised, internationally valid technical terms for ESG reporting. Many countries formulate their own, which then lack equivalents.
Michael Diegelmann, chief executive of German investor relations and ESG consultancy cometis, a partner in GEM, said "the lack of comparability makes it nearly impossible for stakeholders to accurately judge what's happening".
Asian markets worse off
A Deutsche Bank CIO report, meanwhile, cited the many opportunities for ESG investment in Asia, but also its many challenges. It said Asia's diversity - in many aspects such as income levels, types of government, geographical reach, etc - would make standardising ESG standards with a coordinated methodology and taxonomy even more difficult than it is in Europe or the United States. This poses an issue when it comes to standardising data, it said, with the future growth of ESG investment in Asia interlinked with such data.
Comparability of ESG disclosures is currently a greater issue in Asia than elsewhere in the world, according to Fiona Reynolds, CEO of Principles for Responsible Investment (PRI), a United Nations-supported network of investors working to incorporate ESG issues into investment practices.
Speaking at an IMAS-Bloomberg Investment Conference panel discussion, Ms Reynolds said this is due not just to the lack of consistent disclosure requirements but also to the more limited coverage of the Asian market by the typical ESG service providers such as MSCI and Sustainaly-tics. An alignment of disclosures would be key to the region's success when it comes to driving and delivering a sustainable financial system.
What this means is that, even as we tout the growth opportunities ESG investments present to the region and acclaim both the financial and non-financial benefits these present to economies and communities, we need to develop a way in which stakeholders can ably assess their objectives and results.
Investors can only properly evaluate a company's ESG investments if they know and understand the efforts that have been made and their effects on the company, and how these compare with similar efforts across sectors, industries, geographies and portfolios - depending on investors' objectives.
This will also help ensure that companies go beyond box-ticking and greenwashing - defined loosely, in this context, as putting a much more positive spin on one's ESG efforts than is warranted - as their disclosures will be held up to close and informed scrutiny by their stakeholders and potential investors.
Addressing deficiencies
So, what needs to be done?
Technology - in the form of artificial intelligence (AI) and digitalisation - can help close the information gaps.
Deutsche Bank CIO's report pointed out how these can be used to help with deficiencies in the quality of existing ESG data; and support the harmonisation of data, ESG stan-dards and government frameworks.
Asian policymakers could also take a leaf from Europe, where regulations are being rolled out to ensure minimum standards of disclosure across that region. The European Supervisory Authorities has proposed technical standards on what will need to be disclosed under the Sustainable Finance Disclosure Regulation (SFDR), with a view to improving transparency and comparability and reducing greenwashing.
As much as markets may loathe the prospect of more regulation, this might be the exact thing Asia needs to bring about better ESG disclosure standards within each jurisdiction and to harmonise standards across jurisdictions.
The US Securities and Exchange Commission (SEC) has also recognised that it needs to step in to ensure that material ESG information reaches the markets in a timely manner. Its acting chair Allison Herren Lee said recently that investors' demand for better information is not being met by the current voluntary framework; she rolled out a number of near-term measures to begin boosting the level of ESG disclosures and transparency for companies there, with more long-term measures in the works.
In Singapore, regulatory efforts have begun to address environmental risk in the banking sector. The Monetary Authority of Singapore has proposed guidelines on Environmental Risk Management, which seek to enhance financial institutions' resilience to and management of environmental risk. They set out sound practices in relation to these institutions' governance, risk management and disclosure of environmental risk.
Such an approach could be considered for the broader market when it comes to ESG concerns.
But the push cannot just come from the top; investors and asset managers will also need to play their part in driving change by choosing to direct their investments towards the targets that meet good disclosure standards while pushing others to provide more clarity.
Mark Konyn, group chief investment officer of AIA, said in the aforementioned IMAS panel discussion, "(As an asset manager,) you have to make a decision on whether or not you're willing to allocate capital to companies that don't consider these (ESG) factors important on a forward-looking basis ... I think we're reaching the point where you have to stand up for what you believe in and you have to hold your investee companies accountable."
Investors, governments and corporations alike cannot shy away from such efforts if economies here are to rebuild and reposition for the next phase of growth. While the pandemic has inflicted much damage, it has also gifted the world new opportunities - and we would be wise to seize them.
