It is an interesting time to be talking about both Asia and ESG.
Although there are well-documented macro headwinds globally, China is a bright spot. In contrast to many developed markets, where authorities are tightening policy to tame inflation, China has moved to ease financial conditions and access to funding.
Moreover, we believe that the fastest acceleration in ESG practices and reporting is now happening in Asia. Although the region has historically been one where ESG was perhaps a step behind most notably Europe, regulators and corporates are moving extremely quickly.
We see significant progress, particularly in China, but also across Asia more broadly including the development of a very thoughtful regulatory regime. Work is underway to develop taxonomies to help market participants determine how ‘green’ an activity is, while fund-labelling requirements are starting to be rolled out by regulators in a way that is considered and forward-looking. By way of example, last year China started the operation of a national emissions trading scheme (ETS) in 2021, and we would expect this to be a meaningful tool for carbon reduction over time.
Turning to corporates, there is an acceleration in ESG sophistication that will see a number of Asian companies emerge as regional, even global leaders. Reporting is far more sophisticated than even three to four years ago, management teams are increasingly aware of both risks and opportunities, and communication has improved. This improvement is happening at different speeds across the region, of course, but overall standards are improving.
We’ve been investing in China for a long time and a differentiated approach to ESG emerging. While a few years ago we tended to see only scant ESG disclosure, this has changed. A number of companies now release ESG reports, and some are detailed and thoughtful. However, many reports still only focus on metrics and static data points without going into detail about forward-looking targets, and strategies to achieve these targets. Few include information about how achieving the targets is baked into executive remuneration. Where there are targets, they tend to be around water consumption and greenhouse gas emissions, such as CO2, SO2, and NOX.
It’s the leading companies that are now moving towards marrying the static data points with longer-term targets and strategies for meeting them. This is more common in the Hong Kong and US-listed Chinese firms, albeit the A-share companies (i.e. those listed onshore in China) are starting to do this too. This is consistent with what we are seeing in other markets – a move from static data points to a forward-looking target, plus commentaries around how to reach that target and what this means for the business and the strategy.
Investors and regulators have played their part in moving disclosure forward. When engaging with companies, it is important to be very clear about what is needed in terms of disclosure and why. Disclosure is not something that should be driven by regulations; instead, companies should think of it as a way of communicating with investors and broader stakeholders, including their customers and employees, about what the company is doing, and how it is managing ESG risks and opportunities.
See also: – A ‘paradigm shift’ in stewardship in China
Guidance around ESG disclosure in China has recently been developed, with a new framework from the China Enterprise Reform and Development Society (CERDS), and other stakeholders. These are currently voluntary guidelines and so we expect leading companies to report well, going above and beyond, whilst others may not report to the same standard. Nonetheless, voluntary disclosure is still a very positive development.
One challenge in China is around resourcing for companies to be able to report on everything they are being asked to report on. A lot of data has to be collected, and companies elsewhere in the region, particularly in Singapore and Hong Kong, have spent several years building teams to collect and report on the data. Chinese companies are still at an early stage with this.
China accelerates extremely fast. Chinese companies will be quick to build out those teams, and when the mandatory requirements come in, they will be ready.
Companies should look closely at ESG frameworks and how they will develop systems and controls that are region-leading. They also need to think hard about capital allocation, staff attraction and retention, as well as supply-chain management. There is a global light shining on supply chains at the moment, so this is an area of particular interest.
However, engagement is multi-year and multi-pronged, results don’t come within three to six months. It’s often a case of consistent, constructive and reinforcing discussions with management teams to investigate what practise and disclosure might look like, including benchmarking and regional peers.
There is a clear incentive for companies here. Investors are increasingly looking to invest in companies with high-quality ESG risk management frameworks, which are well-placed to take advantage of ESG opportunities. This trend may lead to more discriminatory pricing, particularly in sectors that are higher impact and hard-to-abate. Better quality, greener companies will attract a premium.