ESG in Asia - A future view

20 May 2019

Rapid change

We see the rapid rate of change in ESG adoption and awareness in Asia likely to continue in the medium to long term. We believe the increasing adoption by Asian companies of integrated reporting and methodologies such as that recommended by the Task Force for Climate-related Change Financial Disclosure (TCFD) will mean standards between Asia and the rest of the world will converge. Asymmetry in terms of the rate of change will also lessen between Asian countries as standards are equalised. In addition, investor expectations for businesses to adopt more sustainable business practices will lead to more competitive markets and companies both within Asia and on the world stage. Against this backdrop, we believe several key ESG themes will have a long-term impact in terms of risk and driving growth:

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David Sheasby - The Future of ESG in Asia Play Play Video
David Sheasby on the future of ESG in Asia

Climate-related change

Many Asian countries will be susceptible to the physical risk of climate-related change. Specifically, water scarcity, rising sea-levels, flooding, desertification and extreme weather events are likely to have an outsize impact on a large number of areas within the Asia region over the coming decades. Even if the rise in global temperatures can be limited to 1.5o C above preindustrial levels, the environmental outcomes are likely to be severe. However, these risks will need to be scaled by investors according to the increasing impacts of rises of 2oC and beyond.

We can expect to see a substantial focus from Asian companies either voluntarily, or through investor pressure, explaining the resilience of their business strategies against various climate-change scenarios. Corporate Australia has already taken the lead in this area, but we are seeing an accelerated uptake of reporting recommendations by the TCFD across the region. Although there is a long way for Asian corporates to go compared with the European Union and the US, improved climate disclosure is likely to continue with investors increasingly factoring in the impact of this on valuations.

However, we also see the transition towards a lower-carbon environment as enabling opportunity for many Asian businesses. The response to climate change, either through the need to mitigate the emissions of greenhouse gases (GHG) or simply the adaptation to the increasing consequences of a warmer planet are providing innovate companies the scope for future development. From an investment perspective we view this as an area of significant structural growth.

As an illustration of the breadth of this change, in 2017 China added more solar energy capacity than coal-fired energy.

ESG and urbanisation

The growth of Asia’s urban populations will continue its rapid trajectory, with the region set to be home to more than half of the world’s mega-cities by 2030. The pace of urbanisation will be a key driver of economic growth, but will have far-reaching implications for many ESG-related issues. Many of Asia’s mega-cities will face systemic vulnerabilities due to climate-related change, with cities including Shanghai, Dhaka, Kolkata and Jakarta likely to be impacted by diminishing water supplies and rising sea levels. Equally, as major GHG emitters, Asia's urban areas will need to deliver radical solutions to limit their carbon footprints as well as curb the negative health implications of pollution.

Social issues are also likely to be exacerbated because of increased levels of urbanisation. Resource limitations, affordable housing and social inclusion will put additional pressures on infrastructure and government expenditure. Meanwhile, the looming pressure of labour automation and artificial intelligence will challenge human capital and wealth inequality. Importantly though, through the lens of ESG analysis we view these issues as enabling opportunity as well as signalling risk.

Beautiful China agenda

We have already seen a swathe of heavy-weight policies from the Chinese government pledging to build a ‘beautiful China’. The initial emphasis of these initiatives had been to curb chronic air pollution and push for improvements in soil and water quality.

As such, there have been strenuous efforts to reduce the economy’s dependence on coal, targeting natural gas as an alternative and aiming to double its share in the fuel mix to 10% over the next three years. But we believe these environmental programmes will gather much greater momentum in the coming decade. Scale is all important here. The impact of a change in policy from China towards higher environmental standards constitutes a major structural growth driver across a range of sectors in the region, as well as an attendant risk to any assets exposed to the move towards de-carbonisation.

As an illustration of the breadth of this change, in 2017 China added more solar energy capacity than coal-fired energy. Solar installations are growing at a pace, with the government targeting grid parity with fossil fuels and for solar to be subsidy free by 2020. Wind power will also continue to be scaled and the introduction of green-certificate and carbon-trading schemes in 2017 should yet prove to be hugely beneficial for renewable energy providers, with meaningful costs for carbon emitters. The political capital invested in these schemes is tremendous and with China’s environmental credentials being showcased internationally, it makes it extremely unlikely for the government to backtrack on policy. Indeed, we see green financing as likely to play a significant role in the country’s other big-ticket initiative, with a much greater focus on the green aspects of its Belt and Road investments.

Source: From 'World Cities in 2016 – Data Booklet'. © (2016) United Nations. Reprinted with the permission from the United Nations.

Risk warnings – Investors should also be aware of the following risk factors which may be applicable to the strategy.
Investing in foreign markets introduces a risk where adverse movements in currency exchange rates could result in a decrease in the value of your investment.
Emerging markets or less developed countries may face more political, economic or structural challenges than developed countries. Accordingly, investment in emerging markets is generally characterised by higher levels of risk than investment in fully developed markets.