Examining the future of ESG
The many different definitions and interpretations of ESG applied by Asia-Pacific asset managers and asset owners means building a consensus across the region is complicated. But as the scope of ESG is constantly evolving, it is imperative that the industry have an ongoing conversation about what it means and where it is heading.
More S than E
Asia-Pacific asset managers and owners have adopted ESG slightly differently to those in Europe and the US. The region is home to a wide range of economies at various stages of development and with differing priorities.
As Europe and the US are developed economies with social safety nets, ESG investing is focused on the environment. As Asia-Pacific countries do not universally enjoy these attributes, social factors are a slightly higher priority and therefore need to be emphasised when assessing ESG.
Although many countries are already working towards making their economies more sustainable, transitioning will require further substantial investment from asset managers and owners. Without it, the transition will be slow and painful. Furthermore, the push for sustainability could increase carbon emissions in the short term. For example, the palm oil industry is the largest contributor to deforestation and pollution in Southeast Asia. However, its output is used across the region in a vast range of products and moving to sustainable alternatives could put thousands of people out of work before they can be retrained.
Transition finance will be vital in helping the region achieve net zero. However, raising capital while maintaining living standards and enabling growth will be difficult. It may well be counterproductive to defund high-emitting sectors. Therefore, the transition will have to be well-planned and mindful of its impact on society.
Value creation and market demand
The problem for asset managers and owners is that ESG includes many factors without precisely quantifiable value, such as clean air, fresh water, health, and supporting the social fabric. As a result, many ESG initiatives have coalesced around a handful of more measurable themes, such as climate change, diversity, and corporate governance.
Recent events have also changed the way ESG investors think about how they value risk. In particular, the Russia-Ukraine conflict has threatened energy and food security, which could impact the long-term wellbeing of countries in the region. Investors and companies have been forced to rethink their long-held assumptions about where they are heading and what they are doing to reach their ESG goals.
ESG can be a useful valuation metric, helping to develop a more accurate picture of value creation. Data analytics and research can play a prominent role in determining values.
Investors and companies could adopt international ESG standards, but this may be a challenge given the complexities of asset management in the region. Indeed, demand from asset managers and owners for better-quality data is fuelling the rise of local commercial solutions – such as ESG scoring and indices – and regulatory and compliance solutions. As new data sources and research appear, new regional ESG strategies will also emerge to meet growing demand.
Ultimately, the ability to maximise returns will drive investment activity. And as research and valuation tools improve data metrics, asset owners will increasingly see the benefits of making investments underpinned by ESG considerations.
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