The “Sustainability Survey” by SustainAbility and GlobeScan found, in 2009, that governments and companies lagged far behind NGOs and social entrepreneurs globally in driving progress towards sustainability. While this result might be unsurprising, it bears further examination with regard to the real catalysts for change in emerging markets.
In Asia, there are many challenges involved in the effort to establish sustainability standards as business and investment norms. Whereas NGOs in some countries are developing rapidly and starting to gather significant potential to influence public opinion, they cannot be viewed yet as a strong force for change across the region. The ownership of most companies is highly concentrated, dominated by government in countries such as China and Vietnam, and by family interests in most markets. These companies rarely encounter shareholder activism, with most investors being retail rather than institutional, and usually liquidity driven and focused on the near term. There is little pressure from local shareholders to pay attention to environmental, social and governance issues, while mature investors from outside the region tend to have little practical knowledge of how to influence companies here.
In Asia, therefore, the role of governments and government-linked entities, such as stock exchanges and regulators, is crucial for achieving progress towards sustainability. The government of South Korea, for example, made a clear policy decision on the importance of environmental protection and sustainability standards, and has been implementing regulatory reforms since 2001. The government has also played an active role in supporting industry level initiatives. The impact of these moves on the wider business community can be seen in a range of corporate behaviours, from high quality responses to Carbon Disclosure Project questionnaires to the number of Korean signatories to the UN Principles of Responsible Investment. Several regional stock exchanges have recently brought in new regulation on ESG disclosure by listed companies. Bursa Malaysia began in 2006 by publishing a voluntary Corporate Social Responsibility framework for corporate reporting, which was built into a mandatory requirement of listed companies to provide a description of their CSR activities or, if there are none, a statement to that effect. This rule was subsequently incorporated into the Listing Requirements of the exchange.
Both the Shenzhen and Shanghai stock exchanges recently issued their own guidelines to encourage companies to make regular disclosures about their environmental performance. These measures came in response to the emphasis that China’s regulators, the China Securities and Regulatory Commission and the Ministry of Environmental Protection, began to place on environmental performance and compliance standards. At the same time, China’s banks were required to address environmental issues as part of their credit process and to deny loans to polluting and energy intensive companies.
There are questions about the quality of information in China, and significant concerns about the government’s commitment to its environmental agenda while stimulus of economic growth remains its top priority. But these initiatives are setting important precedents for the development of the financial sector in the country.
The burgeoning popularity of SRI indices is also contributing to improvements in disclosure and oversight in some of the region’s capital markets, as stock exchanges become interested to attract high quality companies that can enter such indices. Investors can now invest in index instruments in countries including China, India, Singapore, Malaysia and Indonesia (with a Korean index under development), allowing them to benchmark stocks in those markets and creating flexibility for some funds to include them in their portfolios for the first time. This is, in turn, generating increasing enthusiasm on the part of companies to be included in the indices.
A regulatory and legal regime, which enforces minimum standards of corporate behaviour, is an essential framework for advancing sustainable investing in the markets in Asia. In addition to this compliance approach, however, asset owners have to take the lead in applying commercial pressure both on their fund managers and on companies directly. And it is clear that asset owners located in the region - or in the country - as those whom they seek to influence may have a greater impact than overseas investors with whom there is no personal contact.
In Asia, the largest, and potentially most influential, asset owners are the sovereign wealth funds, reserve funds and public pension funds - all of which are linked to governments (and, therefore, have considerable sway).
As professional investors with an extended investment time horizon, these funds can afford to be fairly tolerant of the short-term volatility exhibited by assets that, over time, offer the greatest likelihood of return. They have the flexibility, therefore, to consider ESG risks and opportunities as part of a long-term investment strategy, and, indeed, it is a vital part of their fiduciary duty that they do so.
For pension funds in emerging markets, many of which are immature and extremely conservative, this is a new concept. Across Asia, however, a number of government funds are beginning to experiment with new policies on ESG and proxy voting.
The Government Pension Fund of Thailand, for instance, has made a clear commitment to sustainable investing, and was one of the founders of the UNPRI. Korea’s National Pension Fund announced its first ESG mandates in 2006, going out into the market to source experienced managers. The Employees Provident Fund in Malaysia seeks to engage on corporate governance issues with investee companies in private meetings, as well as voting at AGMs and EGMs.
As significant asset owners in Asia place more emphasis on sustainable issues, and global ESG investors gradually take on more exposure to the region, a local ESG eco-system will rise up to service them. While there are, as yet, few experienced fund managers, it is encouraging to see the emergence of local ESG research providers and consultants, such as Responsible Research and OWW Consulting in Singapore and Eco Frontier and Solability in Korea, as well as regional membership and advocacy groups. The increasing availability of more quality data and a growing number of ESG professionals in the region will also contribute to the ease of implementation and acceptance of best practice and responsible investment standards.