Environmental, social and governance (ESG) issues traditionally have not been a priority for investors and asset owners throughout Asia as compared to their Western counterparts. However, recent decisions by Japanese pension funds and Chinese policymakers may stimulate more interest throughout the region.
Environmental, social, and governance trends
ESG refers to three factors involved in investment decision making; environmental, social and governance issues. By considering these factors, businesses and governments are attempting to better manage potential risks and encourage long-term sustainable returns and policies. These practices can be implemented in various ways, either through government legislation or through an individual company’s policy.
Influence of Japan and China
The Asset Owners Disclosure Project recently published a global survey reviewing the top 100 public pension funds in order to assess how they were reacting to climate-related risk. The survey found that Japan led the way throughout Asia with most of the 14 Asian funds in the top 100 being Japanese. The highest place fund was Japan’s Government Pension Investment Fund (GPIF) at 37th, with China’s National Council for Social Security at 70th position.
The survey’s findings suggest that Asian investors, asset owners, and companies are now more conscience about ESG issues. This is of particular importance because the standard of corporate governance throughout Asia has historically been lower than that of more developed economies. Amongst other policies, firms are being encouraged to appoint more women to executive boards in order to facilitate more gender equal opportunities and to improve diversity across executive positions.
Leading companies and government funds in Japan, such as GPIF, are a major influence across the region and are now driving a change in attitudes towards more ethical and environmental operating styles. This change is permeating through both public and private sectors, which can be seen through companies adopting similar policies to those leading firms. Therefore, ESG issues have become a permanent consideration for firms that operate or invest in East Asia and governments have started improving policy to establish these issues into Asian governance and business practice.
In terms of global governance, the political leadership in China have also expressed a key change in approach to ESG issues. Xi Jinping was a keen supporter of the Paris climate change agreement which marked a considerable shift in China’s attitude towards the protection of the environment. Furthermore, China in 2017, promoted new Green Credit Guidelines for its financial institutions encouraging companies to invest in green sector projects. While it is early to comment on the outcomes of these projects, the trend highlights an increasing awareness of these issues at the top-level of Chinese governance This can be seen particularly in companies innovating electric vehicles and smart technologies.
These decisions suggest that governments throughout Asia may start to consider taking a more proactive role in mitigating business activities that are endangering the environment. This is due to the power and influence that both the governments and businesses of Japan and China have throughout the region. Moreover, due to this influence, weaker economies within the regions are more likely to adopt the trends and therefore efforts tackling ESG problems, such as climate change, are likely to be made through multilateral cooperation between countries throughout Asia and beyond.
Future prospects of ESG issues in Asia
Investors now are looking beyond the financial aspect of their investments. Therefore, ESG issues are proving of serious importance to the quality of investment and the potential for returns. Accordingly, ESG problems, as shown in the past, can have serious consequences for companies. For example, poor workplace conditions, unethical business practices, and corporate corruption can cause damage to reputation and confidence in a company, resulting in poor returns for investment.
After the revelations that workers at Foxconn were exposed to extreme pressured employment practices resulting in suicides, underage workers and hours exploitation, companies are far more aware of what negative business practices can do to their reputation. Despite a slow uptake of ESG friendly practices, the United Nations’ Principles for Responsible Investment (PRI) has found an increasing number of Asian asset owners and investment managers are signing. These signatories have been mainly situated in Japan and China and suggest that East Asian signatories are likely to continue to rise in number.
The short-term outlook for investors is one of gradual change. Asian companies are yet to be completely convinced of the benefits of ESG investments as many business leaders still believe adopting an ESG friendly operating style could compromise costs and performance. Nonetheless, experts predict that South Korea is set to follow recent developments in Japan, with an increasing amount of academics and business leaders traveling to China and Japan to learn about ESG operating styles.
The medium to long-term outlook for investors within the region ought to consider ESG issues because they are becoming more ingrained into regulatory legislation. This means that any ESG dilemmas could be extremely problematic for returns. Additionally, if companies want to attract foreign direct investment, they will increasingly have to adhere to ESG values. This trend is set to continue and if it develops further it is likely that ESG issues will become a core feature of governance and business in Asia.
