There are plenty of opportunities for Asia corporates to improve their ESG disclosures, according to Xinting Jia, ESG investment strategist for APAC at State Street Global Advisors, and global standards being put in place will accelerate this.

Jia pointed to the formation of International Sustainability Standards Board (ISSB) and various countries’ adoption of Task Force on Climate-related Financial Disclosures (TCFD) that will mean the development of a common ESG language for listed companies to follow and report against.

Here, Jia answers ESG Clarity’s questions on the challenges and opportunities of ESG investing in APAC.

What are the main challenges for corporates in Asia in integrating ESG practices? And where do you think Asia corporates are already at an advantage?

Despite the growing demand from investors on ESG integration, due to the fragmented approach of APAC’s regulators compared to that in Europe, it remains a challenge for listed companies to adopt a universally accepted framework and disclose sophisticated and consistent data to allow investors to capture the nuances across different markets.

However, this is likely to change with the formation of the ISSB and development of common languages on ESG/sustainability disclosure for listed companies, investors, as well as regulators etc.

The transition to a low-carbon economy will have a bigger impact on emerging and developing economies, as according to the International Energy Agency investments in clean energy in these markets will need to increase sevenfold by the end of this decade in order to achieve net zero.

In addition, with a growing number of investors setting decarbonisation targets over the next three years, and investors looking for solutions, there is an opportunity for listed companies in Asia to improve disclosure of climate metrics as well as other ESG data to meet the growing demand from investors.

How does State Street Global Advisors approach engagement with Asia corporates on ESG?

Our engagement approach takes into account the idiosyncrasy of Asia and builds on traditional research such as analysing financial statements, industry trends and company growth strategies. When we ask portfolio companies how they approach ESG factors, we consider things like:

• Environmental: does the company use resources efficiently? What environmental impacts, if any, pose risks to the company?
• Social: how does the company treat its employees, customers, community and all internal and external stakeholders?
• Governance: is the company’s leadership structured to facilitate accountability and independence?

We use our voice and vote to address systemic risks and opportunities we foresee for the companies in which we invest as a fiduciary on behalf of our clients.

What have inflows been like into Asia ESG strategies?

There has been a rapid growth in the APAC ESG market. There is tailwind to drive further investment in ESG thematic strategies as investors are looking to decarbonise their investment portfolios in the next three years.

The likely growth areas include investing in low-carbon indices (for passively managed portfolios), switching to an ESG or climate-specific benchmark, and integrating green bonds into existing fixed income strategies.

What are the key ESG themes for investment over the coming three years at State Street Global Advisors?

Our approach to ESG investing combines customised portfolio construction, our proprietary R-factor ESG scoring system, a wide range of ESG investment solutions and thematic climate investment strategies.

Working closely with our clients, we will continue to focus on exclusionary screening, ESG best-in-class solutions to deliver ESG performance, ESG integration for alpha-driven investment strategies, and climate investment solutions.

In addition to sustainable climate equity investment solutions, we have also developed sustainable climate bond solutions.

The road to net-zero emissions will potentially take several decades; to successfully take that road requires a long-term, forward-thinking investment approach.

State Street Global Advisors has developed a new active equity strategy with targets leaders in climate transition planning and progress. The Global Climate Transition strategy will offer investors an opportunity to benefit from the journey to net zero.

What would you like to see next in terms of ESG regulation?

Further developing ESG regulations based on internationally recognised framework such as the TCFD and ISSB disclosure standards (currently under consultation) will help bridge gaps and build consistency in ESG reporting across the investment chain.