An inside look: ESG perspectives from Asia Pacific to the world
ESG is a growing priority in Asia Pacific, creating opportunities for investors globally. At a SimCorp panel, three specialists explore the unique challenges in the region and explain why APAC plays such a critical role in driving the transition towards sustainable finance.
The importance of Asia in the global sustainable finance transition
Asia Pacific generally lags behind more progressive regions such as Europe when it comes to sustainability standards, data and reporting. However, despite the slow start, our panellists agreed that there are plenty of opportunities for investors globally, as APAC firms embark on their ESG journeys. Moreover, they emphasize that Asia is one of the most critical regions when it comes to solving the global sustainability challenge.
“Roughly 60% of foreign direct investment globally has been coming to Asia for the last two to three decades, and we see no sign that will change anytime soon. That’s because this is where the manufacturing facilities of the world and the distribution centers are being built,” notes Kamran Khan, Head of ESG for Deutsche Bank in Asia. “In the past, people used to manufacture here and then sell in Europe and North America. Now they're finding the best markets for their finished goods are also shifting to Asia. When we look at the global supply chains, again more than 50% of global sourcing happens out of Asia."
The risk to humanity is that if we don't ensure that the future development in Asia is truly sustainable, not on paper, not in words, but in reality - then no amount of recycling in Europe is going to save the Earth.
Head of ESG for Deutsche Bank in Asia
Lee Bing Yi, Sustainability & Climate Change Director at PwC Singapore adds, “The APAC region is currently responsible for over half of global emissions, even though we comprise about 37 to 40% of the world’s GDP. The rate of decarbonization in APAC was just 0.9% last year, which is far below the global average of 2.5%. And that's compared to the 13% that we need every year from now until the end of the century to meet our goals under the Paris Agreement. This makes it imperative for the APAC region to act now.”
The good news is that APAC investors are becoming more proactive when it comes to ESG. The panel highlighted active ownership as a great way for asset managers to truly bring their sustainability agenda to the table, creating opportunities to influence firms to do good.
Not every battle will be won, but as Stephen Reilly, COO at HESTA, an Australian superannuation fund, explains, “it’s also about leadership of thought and the huge role we can play by being part of the conversation. At the end of the day, if you're going to manage the transition, you will ultimately need people in the room who genuinely want those businesses to transition.”
[With active ownership], we're in a privileged position to influence to achieve positive change due to our scale and long-term perspective.
COO at HESTA
Understanding ESG in the Asian context
For ESG investors to truly make a difference in Asia Pacific, they first need to define what sustainability means to them. At this stage, it means different things to different people in the region, so it can be hard to know where to begin.
Bing Yi and Reilly both agree that purpose is a critical component. Reilly stresses that he leads a purpose-led organization, where it’s essential to look after the interest of his pension’s fund members. This requires long-term investors like HESTA to deeply consider ESG issues like climate change and gender equality that can impact the value of members’ investments and their retirement outcomes. He adds that these are health and community service workers who care deeply about how their money is invested, and ultimately, the world they will be retiring in.
Khan takes a more pragmatic view. “Our job is to help our clients on several fronts. First, think about how you put ESG in a commercial strategy and make it better. How do you create alpha by adding ESG into a business model?” he says. “Second, ask how we will be judged on our efforts. What metrics should we report? Third, we need to execute the transaction in a way that makes sense for a particular company in a particular jurisdiction.”
Given the fragmentation of the APAC region, the last point is critical. As everyone builds their own ESG taxonomy, some of which are very closely tied to the EU approach, what does that mean for Asia?
The panellists point out that if EU standards are used, then investors need to know sustainability well enough to adjust the implementation in line with the realities in Asia. Most organizations cannot currently achieve this, which is why the ‘copy-paste model’ used by many buy- and sell-side financial institutions doesn’t work.
Instead, solving the standards challenge means demanding the right data from companies. Investors must work with firms to identify the core elements of sustainability and then ask for metrics to track them. If that data isn’t provided, then the transactions shouldn’t be reported as ESG.
According to Khan, access to data is not the root of the problem in Asia:
"Unless people ask [for the relevant data], companies are not going to provide it. They don't know what to do, and even if they did, they're not going to do it on their own. At the moment, that's where the bottleneck is with a lot of financial services institutions and investors in Asia. They don't yet have enough depth of understanding to ask their clients or portfolio companies the right questions.”
The realities of greenwashing and standards
Standards play an important role in making sure that ESG investments stand up to scrutiny, particularly as concerns about greenwashing are on the rise.
Responsible investing means more than simply doing the right thing. Investors must have data and reporting that substantiate their ESG claims, something that is particularly difficult in APAC where standards are less mature than the rest of the world.
Bing Yi adds that the combination of poor data quality and lack of availability can make it tricky for investors to make informed decisions. In his view, ESG reporting disclosures and information need to be treated with the same rigor as financial reporting. He also raises two important points that exacerbate the difficulty of these decisions: first, the pace of business development in ESG outstripping the risk and compliance functions, and secondly, the lack of internal verification measures.
“Banks in APAC are very keen to grow their sustainable financing portfolios,“ says Bing Yi. “One challenge I observe is that these organizations may not always have robust internal checks and balances to make sure that they are setting meaningful and ambitious KPIs and targets for their clients when sustainable financing products are originated. I think this an area that is less mature compared to other areas of risk and compliance.”
The panellists also warn that firms in APAC rely too often on external ratings. This is problematic because they are not 100% reliable and don’t update in real time – meaning it can take up to six months to see adjustments. This is no different from other parts of the world: rating agencies’ reporting standards are so fragmented that it is difficult to ensure different companies report on ESG data in a comparable and consistent format.
According to Khan, the answer lies in evidence-based ESG, which addresses the over-reliance on ratings. “If all that you have to back up your ESG claim is a rating of that company, then what value are you creating as an ESG investor?” he points out. “Your limited partners (LP) could look at those same ratings and make investments directly, so why would they go through you and pay you a management fee?”
“In regular non-ESG investments, you claim that you know the sector, know how to manage financial risk, and can examine an issue from 15 perspectives that an individual wouldn't be able to.” He continues. “This provides the argument that a client should trust you to manage their money.”
Reilly agrees on the importance of evidence-based investing. “The more evidence that we can provide, the better: it holds our investors to account, it holds our partners to account, and it forces us to think about these decisions.”
The path forward
ESG funds are outstripping non-ESG funds in terms of inflows, and the direction of travel is clear. However, reporting and standards are thus far failing to keep pace.
The panellists argue that the success of initiatives will depend on how quickly companies can take advantage of learnings from the rest of the world and innovate to adapt these to the Asia Pacific market. As Reilly mentions, the region is in a unique position. “The opportunity that presents itself is a leapfrog one,” he says. “How do you skip from the sustainable equivalent of landlines and go straight to mobile?”
He also points to the debate on returns, posing an optimistic outlook.
It's a false dichotomy to say you can choose returns, or you can choose sustainability, because there still are enough sustainable options to provide good returns,
COO at HESTA
“We're all lucky to be alive at a time when you can do well and do good at the same time,” Khan concludes. “You can have returns and you can also have impact.”
SimCorp is part of a global ecosystem connecting the world’s largest financial players and a leader in our field of services. Services that allow our clients to manage trillions of dollars in assets – and by extension, affecting millions of lives all over the world. With this position comes a great responsibility and an obligation for us to embed sustainability into everything we do.
In fulfilling our purpose of ‘Enabling a prosperous life in a liveable world’, it’s our ambition to be a leading provider of sustainability-related solutions and to support the industry in its transition towards sustainable finance. Already, we make it possible for the world’s largest investment institutions to turn sustainable ESG investing into a mainstream activity across their investment business areas. We do this by offering data services across financial and non-financial data, by offering comprehensive services for ESG regulation, and by enabling the use of ESG metrics and new analytics across the value chain of investment operations.