Tighter scrutiny looms as Asia delivers lacklustre ESG report cards
Asian supply chains have been slow in raising environmental, social, and governance (ESG) standards in their business practices, but there are pockets of improvement among some companies in the region as the global demand for higher accountability from investors steps up, analysts have told AsianInvestor.
The gains are most noticeable in the environmental area such as carbon reduction pledges by Asian economies though how quickly its manufacturing sectors – major suppliers of parts and components - are translating words into actions remains to be seen.
Meanwhile, Asian supply chains are also improving in social and governance standards such as employee welfare and gender diversity – often perceived as subpar by the West – but they may face tighter scrutiny as global ESG standards are also rising.
CLIMATE CHANGE IS TOP OF MIND
“Asia and Southeast Asia have been slow to jump on the ESG bandwagon in comparison to Europe and the US. However, the region is catching up fast, with countries like Japan, South Korea, and China, planning to go carbon neutral between 2050 and 2060,” Ramkumar Venkatramani, investment advisory lead at Kristal.AI, told AsianInvestor.
This will hasten investment into renewable energy sources, thereby driving investment into these assets, with interest from pension plans and sovereign wealth funds in several Asian countries fuelling the demand, he said.
Within Southeast Asia, Singapore had introduced in 2019 the carbon tax – the first pricing scheme of its kind in the region - as part of its contributions to fighting global warming and achieving a net-zero economy, he said.
The current tax of S$5 (US$3.60) per tonne of carbon emissions – low by comparison with European standards - will be increased progressively to S$45 per tonne in 2026, with a view to reaching S$50 to S$80 per tonne by 2030 to allow businesses to adjust.
Other Southeast Asian nations such as Indonesia, Thailand, Malaysia, Vietnam, and the Philippines are also beginning to take more positive climate actions in areas such as renewable energy, water management, sustainable farming, and aforestation to meet institutional investors’ expectations despite some resistance from domestic lobbies.
Agricultural production – one of the highest carbon emitters – is an Asian supply chain issue that needs to be addressed, said Venkatramani.
“Asia is home to the world’s largest rice producers, and almost 40% of global rice export originates from a handful of Asian countries. As such, sustainable farming in the region is vital to ensuring longer-term food security globally.”
Five of the 10-nation Asean grouping – Indonesia, Thailand, Vietnam, Myanmar, and the Philippines – are among the world’s top 10 rice producers, which also includes China and India.
A recent report by Asia Research and Engagement (ARE) found that only 16% of Asia’s biggest companies in food & beverage, retail, hospitality, and catering include responsible protein sourcing policies as part of their ESG disclosure, a gap that undermines their climate, aforestation and sustainable development goals.
Another existential threat to ESG standards in Asia comes from the technology sector, Richard Clode, co-portfolio manager of the sustainable future technologies strategy at Janus Henderson Investors told AsianInvestor.
“Semiconductor manufacturing is one of the rare carbon-intense activities in the technology sector and is unfortunately concentrated in Taiwan and Korea. That makes it challenging for the industry to reduce its carbon emissions,” he said, as these countries are highly dependent on coal energy and currently lack renewable alternatives.
Taiwan – home to the world’s largest foundry TMSC– and South Korea – where Samsung is a global chipmaker – are major suppliers of computer chips to renowned technology firms like Tesla, Apple, and Qualcomm.
SOCIAL AND GOVERNANCE FACTORS UNDER SCRUTINY
When it comes to the S and G of the ESG spectrum in Asia, asset owners are focusing on diversity, community development, and labour practices on the social front, while board composition and auditing practices are the key governance issues, said Clode.
He cited the example of Korea, where cultural gender diversity is traditionally a major challenge when it comes to management and board composition.
“We have started to see some progress here, as we have on historically poor attitudes towards organised labour, but there is much more that needs to be done,” he said.
Turning his attention to internet platforms in China - the subject of recent regulatory crackdowns - he said his firm spends time with the companies to understand their user’s privacy protection measures because these companies play an important role in reforming the Chinese economy and historical attitudes.
“Apple is one of the few major global technology companies with a business in China. As such, we engage with them to understand how they look to balance their corporate values with, for example, app take-down requests in China and other countries,” he said.
Mayer Brown’s corporate and securities partner Mark Uhrynuk believed that ESG regulations coming out of Europe, and the UK in particular, will impose diligence and disclosure obligations on companies with respect to compliance issues.
These issues include not just climate-related attributes but also social factors such as diversity and inclusion, employee safety, health and welfare, modern slavery, and other human rights concerns within the supply chain.
Asset owners will require disclosure of information consistent with sustainability standards such as those developed by the Sustainability Accounting Standards Boards (SASB) from asset managers or companies they invest in to better understand, evaluate and assess potential risk and opportunities, he said.
“Of course, with many global supply chains having their roots in Asia, these regulations will have an impact in the region,” he said.