Clarity Clinic: Hardik Shah, GMO

In this week’s edition of the Clarity Clinic, GMO’s ESG practice manager, Hardik Shah talks about the challenges preventing wider ESG adoption in Asia, and outlines the subtle differences between investors in the region and the wider world.

In this week’s edition of the Clarity Clinic, GMO’s ESG practice manager, Hardik Shah talks about the challenges preventing wider ESG adoption in Asia, and outlines the subtle differences between investors in the region and the wider world.

1. What do you consider to be the current highest profile ESG topics for global investors?

Globally, climate change is the number one topic by far, but we have also seen an increased client interest in issues relating to the environment. With climate, there has been far more investor activism around the topic.

Companies have been pretty much waiting for regulation before making their move, although there have been a few that are already transitioning their businesses. There are a new set of influencers that are trying to pressurise companies, which has had significant influence. That will accelerate behaviour, particularly in Asia.


2. What do you consider to be the biggest driver of changing corporate behaviour in Asia on climate issues – regulation or investor influence?

It is more investor action rather than regulation because regulation is still catching up. The Chinese Carbon Trading Scheme is one of the few examples where regulation is actually driving change in the market. But, in the rest of Asia, it is investor influence.

There is also a changing business reality. If you look at India, for example, the government is pushing solar, and the cost has drastically reduced which has made it very competitive. It is no longer purely about doing something good for the world.


3. Much has been made about the growing investment potential that exists in renewables globally, is that also the case in Asia or do regional dynamics make this investment case difficult?

In South East Asia, governments want to do more, but they can’t as the quality of grid is the challenge. Renewables have established their viability to act as a substitute for baseload in many areas and there has been an improvement in storage technology. As a result, governments in parts of Asia, such as India and China are now looking to improve the grid infrastructure. Grid connectivity is not necessarily the best it can be in all countries.


4. Are there other themes that are unique to the Asian region as far as building an ESG investment case is concerned?
Yes. Take the environmental impact of supply chain and supply chain risk from both an environmental and a social perspective. This is particularly the case with palm oil. A lot of the global supply of palm oil comes from plantations in Indonesia and Malaysia.

The slash and burn activities that are used in Indonesia to clear forests cause a lot of environmental pollution, particularly in Indonesia, Singapore and Malaysia. As a result, there has been a lot of investor interest in stopping that behaviour.

There has also been work in terms of monitoring labour practices, as many in the industry can be stuck in really low paying jobs. Investors are keen to ensure that plantations are offering a minimum wage and not exploiting the poor to make a profit.

While we haven’t liaised directly with companies on this topic at GMO, I have seen investor coalitions looking at this from an engagement perspective, who are trying to collectively influence companies.


5. How would you describe levels of ESG awareness among Asia investors?
Demand from Asia is barely there and discussions are very limited. Actions are very much from a regional perspective. While we have been having discussions with large asset owners in the region, and they have been enquiring about why ESG makes sense, there is hardly any money being allocated. People don’t want to make the first move. They are very hesitant.

There has been a lot of talk, but not much action. Excluding Japan and Australia, demand from Asia is low but the conversations are increasing. When we have a prospect meeting, things are changing, but I would still say we are far away from vast sums of money being allocated.


6. What needs to change to make that happen?
If the regulators, industry bodies, trade associations, banks and investment managers upped their games or there were some more regulations, it would get the ball rolling here. Enough has been said in terms of educating people as to why this makes sense.

There needs to be some guidelines form a regulator. The Monetary Authority of Singapore is the one of the most influential here. In 2018, they have shown a lot of interest in Green Bonds and equities. They are being more explicit about what are the barriers and they can support the wider adoption of green finance, so momentum is building here.

The stock exchanges are also involved and they are a bit of ahead of the curve and the level of disclosure is improving.