by Radhika Mittal radhika.mittal@csr-asia.comRI stands for Responsible Investment and has been interchangeably used with Socially Responsible Investment (“SRI”) in this article.‘RI Asia 2013: The Investor-Corporate ESG Summit’ took place in Singapore on 19 – 20 March. It brought together investors and companies, and discussed the status and future, challenges and opportunities of Responsible Investment (RI) in Asia. Some major issues stood out throughout the panel discussions and presentations. The reoccurring statements were: 1. the lack of understanding around RI. It was pointed that RI was often associated to mean something that would cost an investor its profits and not seen as long-term management of risks. 2. The concept of ‘push and pull’ from investors and companies. Investors need to push companies for more ESG information and companies need to make more such information available.
The event shaped my thoughts around this push and pull in the context of Asia.
1. The push from investors
A straight path to increasing responsible investment is when investors commit to the principles of SRI. If an investment is based on a company’s ESG rating it would push more companies to improve their sustainability performance to garner investor confidence.
So, is there a push from investors in Asia? Looking at figures, it seems not. Out of the estimated US$13 trillion worth of professionally managed assets that incorporate such measures in investment selection and management, Europe accounts for 65 per cent while Asia accounts for a mere 0.6 per cent – US$74 billion. However, the phenomenon of sustainable investing has an impact on Asian markets, in spite of low SRI funding. Asian companies that have foreign investment still run the risk of losing this investment if they do not meet ESG requirements. For example, last year, Norway’s US$710 billion sovereign wealth fund pulled out of 23 Asian palm oil companies after accusing them of causing deforestation.
If international networks around responsible investment are a telling sign of increasing push from investors, then this trend is on a slow, but definitely steady rise in Asia. UNPRI (UN Principles for Responsible Investment) is an international network of investors working together with a goal to “to understand the implications of sustainability for investors and support signatories to incorporate these issues into their investment decision making and ownership practices”. The Asian membership isn’t growing at the same rate at which the total global numbers in PRI are increasing. Furthermore, majority of the signatories in Asia-Pacific are from Japan and Australia. Nonetheless, it is encouraging to see that the Asia-Pacific membership has grown from 166 signatories in the past years to 214 in 2012.
2. The pull from companies
Investors cite that they would like to see more sustainability disclosure from companies in Asia and it would enable increased investor confidence. When a company discloses ESG performance, it inevitably becomes more attractive to a larger base of investors (as it would now also include socially responsible investors). When an increasing number of companies do the same, more investment companies would see the value in considering ESG in their investment criteria. By that logic, companies that are currently not disclosing (enough) on their ESG performance would look into stepping up their game in order to avoid losing investments.
So, is there a pull from companies in Asia? With more regulations (for example, from national stock exchanges) and awareness around ESG disclosure, companies are increasingly looking at their ESG performance. Whether they are improving it because they want to attract investors is questionable. Company stakeholders expressing an interest in sustainability most likely do not include investors as yet. Nonetheless, there is an increased focus on sustainability reporting which can be predicted to contribute to increased investor confidence and eventually, to the overall responsible investment agenda.
3. The push from Governments & National Stock Exchanges
Governments throughout Asia are also launching new reporting guidelines and regulations requiring companies to disclose ESG data. Furthermore, the emergence of responsible stock exchanges is further encouraging RI in Asia and is also providing companies with a business case for attending to their ESG performance.
In China, the Shenzhen and Shanghai Stock Exchanges have introduced guidance on sustainability reporting. In Shanghai this was accompanied with environmental disclosure guidelines for all listed companies. The Shanghai Stock Exchange launched a responsible index.
Indonesian legislation on CSR requires companies to disclose on ESG activities. Also, the SRI-Kehati Index was launched in 2009 by the Indonesian Biodiversity Foundation, KEHATI. The Indonesian Stock Exchange (IDX) supports this index. The index evaluates companies based on their performance across a number of ESG areas including environment, community, corporate governance, human rights, business behaviour and labour practices.
In the Philippines, the government requires companies that have applied for investment assistance to implement corporate social responsibility (CSR) programmes. On top of that, the Corporate Social Responsibility Act of 2011 prohibits publicly listed companies “from retaining surplus profits in excess of 100 percent of their paid-in capital stock except when justified by definite corporate expansion or corporate social responsibility projects and programmes approved by the board of directors.” The Act also states that, “All large tax payer corporations shall submit as part of its annual report to Securities and Exchange Commission (SEC) the list of activities relative to their corporate social responsibility.”
In Thailand, the government is beginning to encourage sustainability reporting from its listed companies. The SEC (Securities and Exchange Commission), in partnership with the Corporate Social Responsibility Institute (under the Stock Exchange of Thailand “SET”) is planning to make it compulsory for firms to release information on their CSR activities. Any firms planning to issue new securities will have to disclose on form 69-1 whether they have operated as per SET’s 2012 document on CSR practices regarding stakeholders, the economy, the society, and the environment. The disclosure will provide important information to investors. The regulation is expected to be effective from January 1, 2014 onwards.
Malaysian public listed companies are required to incorporate a description of the CSR activities or practices undertaken by the listed company and its subsidiaries or, if there are none, a statement to that effect. Malaysia’s Stock Exchange, Bursa Malaysia, has also announced that there will be an ESG index.
The Korean Exchange Socially Responsible Investment (SRI) Index was launched in late 2009. This was followed in 2010 with two more indices including the KRX Green index focusing on green industry related businesses.
In Singapore, there is a possibility that SGX would introduce a sustainability index to push more listed companies to disclose more on their ESG performance and to provide investors more sustainability information on companies. SGX chief executive, Magnus Bocker recently reported that the bourse operator was mulling over the idea of a sustainability index as more investors were becoming aware of sustainability issues.
Should investors or companies take the lead?
It may be that this issue is a classic case of what comes first – the chicken or the egg – but that may not work too well for Asia. Many of the above changes are happening simultaneously (albeit slowly), and are most likely taking place in vacuum from each other. Companies are improving their ESG performance, but not necessarily looking at investors as important stakeholders. Investors want more ESG disclosure, but do not know how to connect with companies and convey this concern. These changes need to continue to happen simultaneously but more such interaction (as offered by RI Asia 2013) needs to take place between various bodies like asset managers, companies, government, ESG rating firms and the media. Nonetheless, discussions around RI have begun and more parties are looking to answer the question – how do we include ESG in investment criteria?
(Source: CSR Asia)
