The global investment industry has undergone a significant shift. The acceleration of the momentum of sustainability investing has made it imperative for investors to integrate environmental, social and governance (ESG) factors into their investment processes. 

Complexities and challenges in ESG investing

In the last decade, ESG has expanded in scope and is used in myriad ways to suit the needs and expectations of multiple stakeholders. In some cases, this integration has led to greenwashing. 

In Asia, however, ESG adoption remains in its early stages. In 2016, Asia (ex-Japan) accounted for only 0.8% of global ESG Investing assets.  Some of the main reasons for the slow adoption include:

• Fragmentation of data and disclosure
  Like many of their western peers, investors in Asia view the scarcity of comparable and historical data as barriers to ESG integration. For instance, a lack of high-quality standardised emissions data has been a hurdle for capital markets in Asia to transition to lower carbon economies. 
  
  Asia’s differing levels of regulations and transparency in a highly heterogeneous region means the fragmentation challenge is more pronounced. Without a supranational governmental body like the EU, local industry standard setters are introducing regulations at different paces due to the nuances and maturity of their ESG markets. The lack of coordination in ESG disclosure requirements creates further fragmentation of data and leads to questions over the consistency of the ESG ratings. Such data gaps make it hard for investors to assess ESG investment risks and opportunities. 
  
• Knowledge gaps in ESG 
  The industry also faces a lack of ESG professionals who specialise in sustainable investments. This situation is acute in Asia, which has seen exponential growth in sustainable and green investing. Financial hubs in Singapore and Hong Kong have raised the ESG bar for listed companies in their markets. Demand for ESG talent and expertise has outstripped the supply, leading to a talent crunch. This intensifies the demand-supply mismatch of the industry – asset managers providing generic information to their clients rather than delivering the necessary data that the latter are looking for that best reflects their interests and needs. 
  
• The mindset of Asian investors
  In Asia, investors still tend to prioritise profits because the benefits of ESG integration are less apparent in the short term compared to traditional financial fundamentals. The integration of ESG information into the investment process is often done on a case-by-case basis, and the approach is fragmented.

Many private investors in Asia have yet to incorporate ESG investments into their portfolios, preferring to separate investment performance and social impact. Corporate governance factors are still seen as the most integrated, at least among listed companies, because of their potential impact on share prices. Comparatively, the culture to incorporate environmental and social factors still needs to be developed.   

The silver lining

Despite the less mature ESG environment and the ESG challenges facing Asia, ESG investing in the region has seen progress in part, propelled by regulators, governments and large businesses.

• Regulations
  Globally, there is an effort to create converging and harmonising standards that can be interoperable across various jurisdictions, such as the International Sustainability Standards Board (ISSB), to help strengthen and standardise the practice of non-financial reporting to fulfil investor demand. On the regional level, as part of The Roadmap for ASEAN Sustainable Capital Markets, ASEAN has established its sustainability taxonomy and has published its Sustainable and Responsible Fund Standards to enhance better transparency and promote greater integration and connectivity.
  
  Separately, the Monetary Authority of Singapore (MAS) has taken a proactive role in developing global baseline sustainability reporting standards by participating in international institutions such as the International Organisation of Securities Commissions (IOSCO). It has also outlined clearer disclosure requirements to institutional investors by publishing a circular on new disclosures and reporting guidelines for retail ESG funds in Singapore. 
  
• Innovation and technology
  While Asian businesses embrace the ESG agenda, there is considerable scope for companies to scale green technologies to enhance climate sustainability in the region. As the agri-food sector expands, companies are leveraging IoT, satellite imagery and integrated farming systems to capture critical data to help improve the quality of crops and sustainable production practices.  These data will help investment funds and banks better assess the environmental impact of their investments and achieve long-term returns while meeting the needs of the world’s growing population. 
  
  In addition, technology can also help better sieve out important ESG data and streamline the reporting process. The Investment Management Association of Singapore has developed a Digital Accelerator Programme, which provides a platform for fund managers to tap into fintech to solve problems they face in the asset management industry.  MAS and SGX have also launched an ESGenome Disclosure Portal to streamline ESG data and help companies make ESG disclosures more efficiently. This enables investors to access and compare ESG data to make better-informed investment decisions. 

Responsible investment stewardship 

While Asia explores pathways and capabilities to enable ESG integration comparable to more advanced economies, the absence of formalised standards and tools should not be a hurdle. The increase in investor demand and regulators’ push for ESG means that it is a matter of time before asset and wealth management firms need to align their broader ESG strategy and boardroom agenda to ensure the adoption of the Principles for Responsible Investment (UNPRI) and commitment to the Sustainability Development Goals. 

Investment managers can already add value through responsible investment stewardship – the exercising of responsible allocation, management and oversight of capital, through active ownership and engagement, to create and preserve enterprise value within portfolio companies, and improve long-term risk-adjusted returns for clients and beneficiaries. 

Introduced as a ‘soft law’ in many jurisdictions, stewardship codes take the form of principles to guide institutional investors in reporting stewardship practices. In most jurisdictions, investors are required to discharge their stewardship responsibilities in alignment with their ESG integration efforts. Japan has emerged as the frontrunner of ESG in Asia, given that it is the first Asian market to establish a stewardship code. The Government Pension Investment Fund, the world’s largest pension fund, is a signatory of the UNPRI and has pledged significant allocation in ESG funds, creating a momentum shift towards ESG integration in Japan and Asia.  

In Singapore, the Singapore Stewardship Principles for Responsible Investors (SSP) was revised last year to consider evolving investment stewardship developments. Signatories are strongly advised to showcase their stewardship activities and the outcomes achieved annually to the Secretariat. Case study submissions demonstrating stewardship efforts in line with the principles are published on the SSP website. The Secretariat is currently accepting case study submissions for the year 2023. (Click here to find out more)

Conclusion 

Importantly, regardless of standards, regulations and disclosures, the investment industry needs steward leadership -- the genuine desire and persistence to create a better future.  Steward investors lead in demonstrating how they can drive long-term returns by positively impacting the economy, society, and environment. Asia has seen a boom in family offices and private equity firms, and they can take the lead in sustainability to help portfolio companies in their ESG journeys. 

With the rise of Asia’s affluent investor base, many of whom are millennial and Gen Z investors, the region is gradually witnessing a populace that is more socially and environmentally aware and more inclined to invest along the lines of ESG. 

The call for social responsibility and collective action is growing to develop clearer ESG standards and nurture sufficient investment talent that embraces good investment stewardship practices. Amid the growing demands for ESG integration, a holistic approach that is qualitative and quantitative is required.  At Stewardship Asia Centre, we believe that any rule-based framework must be underpinned by steward leadership. This helps to allay concerns and sceptics about ESG investing and reinforces the belief that it is possible to achieve risk-adjusted returns by addressing the world’s existential challenges. 

The commentary was adapted from the conversations of the speakers of the SSP Networking Series event held in the SGX auditorium on 17 October 2022.