Asia's ESG heroes and villains

Investors are increasingly swayed by ESG issues, as can be seen from the proliferation of divestment campaigns targeting environmentally unfriendly stocks and the rise in companies using new channels and tools to disclose such information. Organizations in Europe, in particular, are leading the way in ensuring ESG reporting becomes a common – if not legally required – practice, as the EU’s recent directive on non-financial and diversity information should illustrate.

It’s a different story in South East Asia and China, where companies are generally seen as less good at disclosing (or even considering) ESG issues than their European counterparts. The region is, however, so vast and diverse that it’s hard to generalize, and there are a great number of issuers in the region doing a good job of it. Stock exchanges in China, the Philippines and Turkey are closing the gap on their western counterparts, while embedded stewardship codes for Malaysian and Japanese exchanges point to disclosure of ESG issues becoming more commonplace for corporates in the region.

Another example: last year Singapore Exchange (SGX) announced trials of a rule that will make sustainability reporting mandatory for all listed companies by 2018, despite voluntary take-up for such measures being slow. ‘Investors are more likely to sell companies that are not green, so while sustainability reporting is an opportunity for green companies to showcase their effort on a global stage, it is also a threat to companies that are not sustainable,’ said Magnus Böcker, SGX’s chief executive at the time.

Moving forward

Loïc Dujardin, director of research products for Sustainalytics’ Singapore office, also believes there is a need for improvement in the region. He notes that increasing numbers of companies in Asia are moving away from CSR reporting that focuses on philanthropic activities toward an appreciation for the material impact of their business. ‘It’s a trend we’ve seen over the past five to six years,’ he says, adding that firms are becoming increasingly aware that issues such as ‘climate change, water scarcity or pollution are particularly acute in Asia and may impact their business.’

A disparity between practices, Dujardin says, means globally minded Asian companies are being persuaded into better habits by their European and American competitors. ‘They have to align their reporting and ESG practices with these companies in order to comply with the same regulations and compete for the same customers,’ he explains.

This is particularly true for larger companies, for which more resources and increased exposure to big investors in Europe – and to a lesser extent North America – mean more pressure. ‘The vast majority of [big investors] have a dedicated team of ESG analysts based in Asia, usually in Singapore or Hong Kong,’ Dujardin confirms. ‘These teams have a mandate to engage directly with Asian companies.’

Pressure is also coming from local investors. For example, Temasek Holdings, Singapore’s government-owned sovereign wealth fund, has 72 percent of its S$223 bn ($158 bn) holdings in Asian companies, with just under half of that (31 percent of its total holdings) invested in Singaporean firms, and has a strong preference for companies that disclose ESG issues well. Temasek’s Annual Review – 2014 states that it ‘promotes good governance and thoughtful values in [its] portfolio companies’, largely through engagement with companies’ upper management and boards.

‘Among our investments are global leaders in water technologies and waste management, including waste-to-energy plants,’ the document notes. ‘We advocate good governance as a principled investor and a trusted steward – from partnering with the International Monetary Fund to develop the Santiago Principles for sovereign investing to fostering good governance in partnership with others around the world.’

For Dujardin, this represents the latest indicator in a general trend he and his team have witnessed over the past six months or so. ‘There are some Asian asset managers that come to us because they’d like to include some ESG indicators in their investment decision-making process,’ he says. ‘I imagine in the next few years these will be the ones that begin to engage local companies on these topics.’

That said, the trend may stagnate unless rules are introduced to back up the change in attitude. Dujardin picks out regulation put in place by the Hong Kong and Singapore stock exchanges and Japan’s stewardship code, introduced last year, as particularly influential, if only for requiring listed firms to publish sustainability reports on a ‘comply or explain’ basis.

Starting as you mean to go on

The companies leading the way in ESG communications are those that have started ahead of the general trend. Rodney Liu, head of IR at Taiwanese electronic component manufacturer Delta Electronics, says Delta has not had to change its practices in the wake of investor pressure. ‘We’re a leader on this front,’ he adds. ‘Occasionally we receive letters from investors suggesting better AGM practices and we follow suit when applicable. But most of the time we move faster than our peers in Taiwan.’

Liu is right to brand his firm as an ESG disclosure leader: not only did Delta win the IR Magazine Award for best sustainability practice in Greater China in 2013, but it’s also a regular fixture in sustainability-minded indices and rankings (see Case study: Delta Electronics, below).

‘I tend to think Greater China is lagging behind western countries, especially in Europe, though the trend is positive,’ Liu says. ‘From reported activities such as awards based on ESG practices, however, we can sense this is drawing more and more attention among listed companies in both Taiwan and China.’ He also believes investors in the area will become more ESG-minded as time goes on, if what he hears during Delta’s own shareholder meetings is to be believed. ‘We believe it is becoming a common mandate for many institutional investors,’ he summarizes.

Another leader in the field is Singapore’s City Developments (CDL), a property developer that takes sustainability issues very seriously and is a former winner of the IR Magazine Award for best sustainability practice in South East Asia (see Case study: City Developments,below).

‘We certainly faced challenges and cynics when we first embarked on integrating CSR and sustainability into our business operations,’ says Esther An, chief sustainability officer at CDL. ‘Even though there was little engagement from the investment community on these issues in the formative years, we held firm to our belief that ESG concerns would strongly shape the future of business.’ From An’s perspective, at least, the last few years have seen a very different situation begin to emerge. ‘Some of our institutional investors are actively looking into ESG issues as one of the bases for their investment decisions,’ she notes, adding that direct engagement is the best way to find out how to start.

It’s perhaps this lack of engagement in earlier years that led to so many South East Asian and Greater China companies trailing their western counterparts – and remaining in danger of being left behind. An agrees, and fundamentally believes consumers – not investors – are becoming one of the main driving forces behind improved transparency and reporting.

According to a Nielsen survey from 2014, she says, 55 percent of global online consumers across 60 countries are willing to pay more for products and services provided by companies committed to a positive social and environmental impact. ‘With green consumerism on the rise, there are tremendous opportunities for companies to adopt greater sustainability and further enhance disclosure and transparency to stakeholders,’ she explains.

Proper reporting

For both Liu and An, there is a whole suite of tools and techniques to make communicating ESG issues that much easier. Foremost among these is to change the way in which companies approach annual, quarterly and online reporting. For Delta the decision was made to publish a separate CSR report on an annual basis from 2005, detailing the firm’s performance in corporate governance, environmental protection, employee relations and social involvement. It is also published according to the Global Reporting Initiative’s (GRI) reporting framework, and ties into the company’s overall corporate mission ‘to provide innovative, clean and energy-efficient solutions’.

CDL, meanwhile, has decided to produce a wholly integrated annual report, according to guidelines laid out by the International Integrated Reporting Council (IIRC) as well as GRI’s framework. The framework focuses on reporting on six ‘capitals’ – financial, manufactured, organizational, social & relationship, human and natural – and how each relates to the others and impacts value creation on a short, medium and long-term basis.

‘This approach aims to make business and financial sense of environmental and social performance, for more meaningful and all-round corporate reporting,’ An explains. ‘Responding to the increased emphasis on materiality, we conducted an in-depth review, engaging key internal and external stakeholders to evaluate and prioritize our material issues.’

For investors, this means CDL’s business is laid out in terms of the economic, environmental and social costs and benefits it confers, rather than just in purely financial terms. The process also digs deeply into the firm’s supply chain where it has been identified as material to CDL’s business, where An says her company has ‘considerable influence’, but not direct control. ‘We believe this new integrated approach to our sustainability report provides greater clarity to the investment community on the material issues that may affect our business and the strategies we have implemented to mitigate these ESG risks – thus allowing investors a deeper assessment of CDL’s prospects,’ she adds.

Meeting expectations

Another valuable channel for getting ESG information across to investors is meetings, Liu points out. ‘We see increasing concerns and questions about ESG issues when we meet with investors so it has become an important topic for me to study,’ he explains. ‘Fortunately, Delta has always been very keen to dedicate [resources] to this and we have won many awards for it.’

Delta’s IR team maintains a very busy annual travel program – three trips to Europe, two to the US, three each to Singapore and Hong Kong, two to Tokyo and one to Kuala Lumpur, plus three conferences in Taipei and four analyst meetings – which means investors are consistently kept in the loop. All meetings are even made available for webcasting, with all charts, facts and figures simultaneously available as viewers tune in. Shareholder proposals, too, are open to an electronic voting system, so investors can vote on any issue, raised at their own convenience, from wherever they like. The upshot is that investors feel they can raise, discuss or dispute whatever issue they like with the utmost transparency.

An agrees with this approach, and though she does not always travel with CDL’s IR team she is often on the road to explain ESG issues to investors. ‘Beyond actively engaging with the investment community on corporate growth strategy via roadshows and investor meetings, our senior management team also participates in conferences on sustainability and ESG-related issues,’ she notes.

In part, this means extending IR’s usual audience and targeting new groups with financial and non-financial communications. ‘In response to stakeholder feedback and increasing requests, CDL has been investing more resources in the engagement of the larger investor community that includes sustainability analysts, ratings agencies and the SRI community,’ An says. ‘This includes dialogue and participation in interviews, surveys, reports and one-on-one meetings on topics such as our business and environmental behavior, how we integrate climate change issues in our business strategy, corporate governance, employee management and community involvement.’

The laggers

The question remains, however: why do so many companies in the region not adhere to these principles? For Liu, it’s not a complicated answer. ‘For many Chinese or Taiwanese companies, [it starts with] poor governance,’ he says. ‘One just needs to look at the constitution of the board, whether there is voting by poll at the AGM, whether companies care about return on equity – the list goes on.’

There are other reasons, too, such as cost, the reorganization necessary to make ESG issues a top-down concern, or even just convincing management that such transparency is a good idea. The best way of examining whether a company is up to scratch, Liu adds, is to check the wide range of indices or benchmarks measuring not only corporate attitudes to sustainable issues, but also how well they disclose such information.

‘For environmental issues, a good indicator is the Climate Performance Leadership Index of the Carbon Disclosure Project, which is organized by London investors to assess listed firms’ efforts to disclose and reduce carbon emissions,’ Liu notes. ‘There is only one company in the Greater China region listed in the leadership index, which comprises more than 160 listed firms globally.’ And which company might that be? Delta Electronics.

Keeping up standards

Such benchmarks are considered equally important at CDL. ‘We continuously benchmark our performance against global best practices and standards, and are heartened that our commitment to ESG tracking, disclosure and reporting has been affirmed by international sustainability performance benchmarks,’ says An, adding that this is made even easier internally by circulating CDL’s sustainability reporting. ‘In our experience, it is an effective tool to measure, improve and benchmark our ESG targets and performance while enhancing corporate governance, transparency and stakeholder engagement.’

In the end, those companies that do not make the ESG grade will find investors begin to look elsewhere, if not due to institutional criteria then because an appreciation for sustainability is, after all, an appreciation for long-termism. ‘This foresight has now set us apart from our peers,’ says An. ‘It is becoming evident that with a changing business landscape, ESG is no longer a ‘good to have’, but has become a license to operate. Slowly but surely, mind-sets are evolving.’

This article appeared in the Fall 2015 edition of IR Magazine