The desire of Asia-based enterprises to improve their ESG credentials to better compete internationally will likely shape the approach within the region to ESG practices.

“Asian ESG now needs primarily to be seen in a global context. And, over time, the increasing relative size of the Asian economies – and their technological dominance – may mean that Asian views on ESG will increasingly drive global ESG, not vice-versa,” said Markus Muller, global head of Deutsche Bank IPB’s chief investment office.

For example, although supervision, taxonomy and disclosure requirements will still play an important role in ESG, the focus may be moving to measuring, monitoring and reporting the actual impact of ESG transactions.

This is due to expectations that ESG transactions and deployment of ESG capital in Asia will increasingly be required to demonstrate impact.

“The push for specificity and granularity vis-à-vis ESG impact is already becoming a key theme in the ESG market and we are seeing a significant rise in KPI-linked bonds, loans and derivatives,” explained Kamran Khan, head of ESG for Asia Pacific at Deutsche Bank.

Multiple driving forces

Asia’s current unique challenges in implementing ESG stem from the region’s economies still being in growth mode, plus generally trailing the US and Europe in terms of income. These are among the factors that might affect ESG choices in Asia going forward.

In line with this, economic growth needs will underpin a desire for stronger environmental performance and better governance, as will the further internationalisation of many Asian enterprises.

Yet while desire for better governance will likely increase, the possibility that progress may be idiosyncratic means there may not be a convergence of governance systems at the national level as well as the corporate level, explained Bert Hofman, director of the East Asian Institute at National University of Singapore and professor of practice at the Lee Kuan Yew School.

“Growth in countries at higher middle income levels depend increasingly on intra-industry productivity increases, and less on structural transformation and resource mobilisation,” he added.

Due to the enormity of the task at hand, Hofman said ESG will have to play a part in aligning corporate objectives with national objectives.

Further, participation in many global supply chains is essential for Asian enterprises seeking global pathways.

As a result, by first addressing negative stereotypes about goods sourced from Asia – such as environmental shortcomings, or “sweat shops” – Asian firms can then hope to win business based on their superior pricing and quality, added Khan.

“This is just as relevant for overseas fund raising: companies, for example involved in US initial public offerings, understand they will be scrutinised closely vis-à-vis ESG risk and are therefore working aggressively to take “ESG issues off the table” before the process starts,” he explained.

Meanwhile, actions by regulators will also likely be one of the most important drivers of ESG in Asia.

Anders Nordheim, senior vice president for Asia sustainable finance at the World Wildlife Fund, pointed to recent examples such as consultations by regulators in Singapore and Malaysia on new Environmental Risk Management (ERM) Guidelines and a sustainability taxonomy, respectively.

Asian ESG investment opportunities

Looking forward, key sectors with ESG potential include energy development, food security and infrastructure, according to the Deutsche Bank IPB insights.

“Future infrastructure development not only needs to be low-carbon and climate resilient, but must explicitly consider the benefits that functioning natural capital provides in the form of ecosystem services,” added Nordheim.

Investors should also consider health and other services. “Healthcare systems in many countries are still relatively underdeveloped, and in some countries the policy environment encourages private investment,” Hofman said. “In light of a rapidly ageing population, especially in East Asia, elderly care and services to the elderly is a promising sector with considerable potential and investment needs.”

In Khan’s view, the importance of transition and consumer finance cannot be under-estimated. “The march towards clean energy through renewables requires capital, technology and increasingly, smart financial engineering.”