Why superficial engagement raises ESG investing risks
Speakers at this week’s AsianInvestor Summit suggested that - often for reasons of PR - the emphasis within environmental, social and governance (ESG) principles for many investors is the 'E'.
At the same time, there is a tendency to believe that the 'S' and the 'G', the social and governance aspects, can take care of themselves to some extent. This has emerged as a concern for some observers who believe that better engagement drives better ESG outcomes.
With a flash online poll at the AI Summit indicating that risk management was the least important consideration in ESG investment policy, Alizakri Alias, former chief executive officer of Malaysia’s Employees Provident Fund said: “If you are putting risk management as your lowest objective, I would say you ignore risk at your peril.”
While there are indications that the different facets of ESG are becoming more integrated, analysts questioned whether there was real engagement between global institutional investors and the Asia-Pacific listed companies in which they invest.
How active are these investors in voting their shares and do they vote against management?
As reported last week, the Asian Corporate Governance Association (ACGA) has highlighted that “the volume of engagement between institutions and companies has significantly increased across the region over the past five years”.
But if companies are to be resilient and sustainable, “boards need to anticipate and address material ESG risks and opportunities,” said Jamie Allen, secretary general of the ACGA.
To dig deeper, as part of its research, ACGA surveyed institutional investors to gain a better idea of how their engagement on ESG issues might be improving.
Their survey reveals that while regulation is becoming more stringent, the ground rules are fairly superficially observed. “Few corporate governance codes of best practice in Asia address in any depth how board composition and governance might need to change to manage material ESG challenges, in particular the overarching issue of climate change,” said Allen.
Investor feedback to the survey focused on how frustrating and time-consuming it often is to secure meetings to discuss ESG and governance issues.
“If institutional shareholders are truly stewards of companies, how can directors not talk to them?” Allen said.
CORPORATE GOVERNANCE KEY
To integrate the different components of ESG, ACGA’s recommendation is that ESG and sustainability reporting guidelines link directly to corporate governance codes as a basic reference document.
“The corporate governance should clearly emphasise the principle of board involvement in ESG reporting as well as sustainability strategy and governance," the agency said.
Promisingly, some Asian corporates are already trying to answer these questions. A few, such as CLP and CK Hutchison in Hong Kong and China Steel in Taiwan, have formed new sustainability committees at board and senior management level.
Across the region, a few countries are also aligning their corporate governance codes with global best practice. In Malaysia, for example, the code states quite unequivocally that a key role of the board is to “ensure that the strategic plan of the company supports long-term value creation and includes strategies on economic, environmental and social considerations underpinning sustainability”.
Malaysia’s code was revised in April this year and, according to Allen, now places even more emphasis on ESG.
Taiwan’s Financial Supervisory Commission announced a new plan for corporate governance in August 2020. Titled ‘Corporate Governance 3.0 - Sustainable Development Roadmap,’ it was described as a “bid to establish a comprehensive ESG ecosystem, strengthening the international competitiveness of Taiwan’s capital markets”.
Meanwhile, the most aligned governance code historically, according to the ACGA, has been Thailand’s. Its principles state: “The board should prioritise and promote innovation that creates value for the company and its shareholders together with benefits for its customers, other stakeholders, society and the environment, in support of sustainable growth of the company.”
STEWARDSHIP LINK
Japan has been one of the few markets in the region to draw a direct link between its corporate governance code and stewardship.
Allen said it is a refreshing change to see that the items in Japan’s Stewardship Code all speak to corporate governance challenges in Japan; areas such as cross-shareholdings, capital efficiency, management remuneration and the appointment of independent directors.
“It is quite rare to learn something about corporate governance in a country from reading its corporate governance policy documents.”
Across Asia, AGM attendance is low, but that is not a shock, said Allen.
"Even before Covid-19 travel restrictions kicked in, participating at AGMs was underwhelming. Nonetheless, investors are using their votes in an informed way and voting against at least one management resolution in a large proportion of AGMs,” he said
“There is value in participating in AGMs in person in addition to individual company engagement between annual meetings. The AGM provides a unique platform for raising questions with directors, company executives and auditors, all of whom may be difficult to meet at other times of the year.
While India and Malaysia moved to virtual AGMs in 2020, some markets like China and Korea did not hold any during 2020, while Hong Kong held just one. Virtual meetings were expressly prohibited in Taiwan and Japan.