Asian companies get serious about ESG
What was once considered optional for companies to report is now shifting to a more mandatory basis, and nowhere is this seen more than in Asia, according to Goldman Sachs’ head of Asia ESG research, Sharmini Chetwode.
‘Integrated ESG reporting – the new normal in Europe – is gradually becoming part of financial reporting in Asia,’ she reveals. ‘Excluding China A shares, Asia’s environmental and social (E&S) performance is on par with that of the US, though conclusions on E&S performance from frameworks alone can be erroneous.’
How then do Asian companies compare with their global peers in disclosing ESG? ‘Asia is keeping pace with – and, in some jurisdictions, outpacing – global averages for disclosures around E&S risks, with environmental metrics featuring most prominently in the rise,’ Chetwode says. The drivers for this rise, she says, include the Principles for Responsible Investing and the Sustainable Development Goals, set by the United Nations General Assembly in 2015.
This is in part spurred by an increasing regulatory push toward ESG disclosure in the region. ‘Over the last three years, for example, we have seen a flurry of initiatives in Hong Kong, underscoring its commitment to ESG and a desire to remain at the forefront of global standards,’ says Chetwode. ‘Japan’s implementation of the 2014 Stewardship Code and 2015 Corporate Governance Code – both of which were recently revised – has forced investors to actively engage with companies to achieve higher returns on equity, capital efficiency and transparency.
‘The Securities and Exchange Board of India made it mandatory for the country’s largest companies to prepare business responsibility reports. Meanwhile, the China Securities Regulatory Commission is requiring heavy polluters to give more detail on emissions and has encouraged all listed companies to voluntarily disclose E&S information by the end of 2020.’
Like many experts in the field of ESG, however, Chetwode says ESG data alone is not enough for true insight. ‘The perception that large datasets can reveal ESG risks is different from the reality,’ she maintains. ‘We need a deeper understanding of a company’s business model, geography and strategy. Whether a company is vertically integrated or has a capital-intensive business model can influence its E&S performance. The same is true of a company’s geographic location and what that implies for access to water, renewable energy and vulnerability to emissions regulation. This is why digging beyond headline numbers is crucial.’
In this way, the most challenging obstacle, Chetwode notes, is the volume and quality of data: more than 450 ESG metrics are available from major data providers for investors to analyze. ‘Deciding which metrics have the greatest potential to impact the company’s financial performance is the starting point,’ she notes. ‘From there, investors have to navigate holes in data availability, lagging data, varied reporting nomenclature and inconsistent levels of data assurance.’
Analyzing the data in the context of a company’s business model and location can provide a better snapshot of its ESG risks, Chetwode explains. ‘But understanding longer-term risks requires an understanding of a company’s strategy and goals, potential scenarios of environmental and climatic threats, and is also dependent on whether the company has the tools – such as the appropriate skillsets, board of directors support and ESG-linked compensation – to integrate ESG into its business,’ she adds. ‘These are key areas of future progress in Asia.’