Seoul, South Korea, March 2011
When analysis of the Asian markets form a financial investment perspective, two factors spring to mind:
- Asia is back. Most countries in Asia have seen astonishing economic growth over a sustained period of time, creating the emergence of a new middle class. In the wake of the regional dynamic, other markets are just about to kick-start economic growth. The dynamic economic development represents – amongst others – new investment opportunities. Huge new investment opportunities.
- Sustainability in the corporate world, to a lesser extent, has come of age and is regarded as a value-adding element of strategic development. However, while the corporate world has advanced tremendously, ESG research methodologies have somehow stagnated – with the result that ESG ratings today, by and large, show a suspiciously strong correlation to company size and sustainability report volumes. In other words: conventional ESG research methodologies are no longer able to identify outstanding sustainable value.
The question is – how to identify long-term investment value in the new markets?
There are no question marks left that the challenges – climate change, raw materials scarcity, aging societies, changing values to name but a few – facing both economies and its players (the corporations) will produce winners and losers; the winners being those who can reduce operational costs (efficiency) while developing new services/products addressing those challenges. All that needs to be done is identifying those future winners. Unfortunately, the global show-cases for sustainable investments such as the DJSI and the FTSE4Good fail to identify outstanding value or even underperform.
While there have been tremendous advancements in the adaption of sustainability-related policies, and the volume of sustainability-related communication has increased significantly, the methodologies and indicators applied by ESG agencies have remained more or less the same. Furthermore, many companies have based their policies and communication on the indicators and questionnaires of ESG rating agencies, resulting in very limited distinction between different companies when applying those criteria - which is probably the reason why sustainability ratings these days are looking suspiciously similar to size ratings.
ESG research needs to be radically renewed and based on indicators that allow for anticipation of future costs, margins, and revenue growth potential, based on sustainability challenges and opportunities.
SolAbility’s ESG 2.0 research methodology, based on such performance indicators, has proven to identify clear outperformance against conventional market as well as conventional ESG benchmarks in the Korean context. Adapted to the characteristics of emerging markets, SolAbility is now applying this methodology to all Asian markets.
The summary findings in the Basic Material Sector are available in a new report, downloadable here.
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