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How Asian investors can step up their ESG integration

Investors in Asia Pacific are failing to adequately consider how companies fare on environmental, social, and governance issues. A new report shares how financiers and policy makers can speed up ESG integration into financial decisions.

Investors in Asia Pacific are failing to adequately consider how companies fare on environmental, social, and governance (ESG) issues, as they are more preoccupied with their financial responsibilities. 

But this may soon change, thanks to a new report by the United Nations-supported Principles for Responsible Investment (PRI) network which charts out a way for investors to balance ESG concerns with monetary ones.

Released on September 7 and titled ‘Investor Obligations and Duties in 6 Asian Markets’, the report found that investing in environmentally and socially responsible businesses benefits a country in many ways.  

For example, financing companies that operate in a sustainable or ethical way can result in better air quality, better health for citizens, and lower rates of inequality in a country.  Responsible investment is also widely recognised for its ability to reduce risk for financiers, and generate better long-term returns.

There is growing recognition of these benefits: PRI has garnered over 1,500 signatories since it was established a decade ago, and globally, responsible investment portfolios are worth US$21 trillion, or about 30 per cent of assets under management. 

However, many investors in six key Asian markets — Singapore, South Korea, India, China, Hong Kong and Malaysia — have yet to fully integrate ESG considerations into their financial decision-making process, found the report, which was co-authored by the United Nations Environment Programme Finance Initiative and the Generation Foundation, an advocacy initiative of investment firm Generation Investment Management.

For example, many of the regulations which promote ESG integration - such as sustainability reporting and corporate social responsibility guidelines - remain voluntary in these countries.

Through research and interviews with more than 50 investors, government representatives and other stakeholders in these six Asian markets, PRI found that ESG integration in the region is difficult for many reasons. 

These include the lack of a universal definition for what counts as a ESG factor, and the view that integrating ethical concerns into investment analysis will undermine financial returns. 

Investors also find ESG integration challenging due to a lack of detailed information on these indicators from companies; there are also few laws and regulations requiring investors or companies to report on sustainability issues. 

Fiona Reynolds, managing director of PRI, noted in a statement that “fiduciary duty is still the biggest barrier to ESG integration”.

To help investors balance their financial responsibilities with the need to evaluate companies for ESG performance, the report recommended that as a starting point, financiers should educate themselves on the business case for responsible investing, and how it creates more long-term value than other ventures. 

Investor firms should also require the companies they invest in to submit high-quality ESG disclosures, noted the report. It also recommended that when choosing investment managers, consultants, or data providers, investors should regard the quality of ESG integration as a key selection criterion. 

But investor decisions are heavily influenced by the wider public policy and regulatory environment, acknowledged the report, and recommended that to give policymakers the confidence to pass laws which require better ESG disclosures and integration, investors should make public commitments to responsible investing.   

On their part, policymakers should communicate that investors have an obligation to consider ESG factors, and require them to report on their efforts to engage with companies on their environmental and social performance. 

Regulations requiring companies to produce consistent, comparable, and reliable ESG reports on an annual basis, and asking investors to disclose their process for factoring in ESG considerations, would also help build investment markets which are sustainable in the long run, said the report. 

It also called on state authorities to lead by example and ensure that their sovereign wealth funds, and other state and national funds, are excellent role models for ESG integration. 

PRI’s Reynolds noted that “in many Asian markets, responsible investment remains a nascent concept; however, we have seen momentum growing of late”.  

She added: “This is  why it’s vital that investors and policymakers work together to ensure sustainability issues keep moving forward across the region.”

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