Now or never: Asia’s sustainability challenge

Ask most people what they would expect in terms of regional differences from a global survey on corporate and investor attitudes to environmental issues and I expect they would suggest that Europe would be the clear leader, setting their own challenging standards and in turn, setting the standards for the rest of the world to follow.

They would probably suggest that Asia has been moving progressively in this direction and in recent years has shown that it too can take Environmental, Social & Governance (ESG) issues seriously.

They would probably argue that the US is only just beginning to set off on this journey, though is doing so with considerable energy right now.

So perhaps the thing that jumps out most from the data from which the Longitude/ING "Now or Never" study is collated, is that for the most part, Europe, North America, and Asia-Pacific are fairly close in terms of the majority of these survey results.

Surveys tend to capture aspiration more easily than they do objective positions

One reason why there is not a greater dispersion in the survey results in line with our prior expectations may be that such surveys tend to capture aspiration more easily than they do objective positions. For example, ask a question like, "In the light of the pandemic, will your company make executive pay more closely linked to attaining ESG targets?", and for a European company already well advanced in such fields, the answer may well be "no" because it already does this to a high degree.

Ask the same question of a US company that until now may have paid no heed to such metrics, and even if it may only be beginning to take such goals seriously and in a totally non-material way, you might get a very different answer.

So in short, interpretation of the data needs to be careful and take the wider global context into account. This will become a far more valuable set of data as it is repeated over time and we can see "direction" and "aspiration" supplemented by some more objective measures of progress.

Results from the survey indicate that at least on the surface, firms across the world are taking ESG more seriously with two-thirds of survey respondents, regardless of region, setting formal environmental targets even prior to the events of 2020. The survey also shows that the majority of firms across Asia, Europe and the US are likely to increase and expand environmental targets in response to the coronavirus developments, led by 113 firms from Europe, 110 from Asia and 103 from the US. This ranking is in line with the prior beliefs we outlined in the introduction.

And although these results suggest that our initial expectation that ESG and sustainable financing is an area where companies from Europe outpace Asia and that in turn, Asia outpaces the US, there are perhaps more important messages we can infer from the data.

Asia is currently in transition with regard to ESG efforts

One of these is that Asia is currently in transition with regard to ESG efforts. Asked whether their companies had a sustainable framework in place, only four firms in Asia replied that they had not and had no plans for doing so. That compares with 10 in Europe and seven in the US. Although Asia trailed both Europe and American in terms of having a working sustainable framework in place as of today, the survey showed that 66 firms from Asia were currently in the process of setting up such a framework - noticeably more than firms in either Europe or the US.

Even if Asia lags its peers in Europe and the US in terms of having a working sustainability framework, the survey shows that actual progress is being made on this in the region as it transitions towards a greater emphasis on ESG.

One area that we feel will be crucial in terms of developing and sustaining the push towards environmental, social & corporate governance (ESG) is practical government support for such initiatives. This is important because although firms can go a long way towards improving their environmental and social impact, it is probable that the commercial imperatives that drive such actions will eventually run out of momentum without a framework of regulations and clear support from governments.

Corporate momentum may stall without a regulatory framework or governmental support

Well informed firms may undertake a number of actions linked to environmental and social issues driven by their own commercial self-interest - recognising that a "green" product may command sales and possibly even a price-premium in excess of any cost consideration. But without carbon taxes, emissions caps, safety standards and the like, this isn't likely to get countries all the way to net-zero carbon emissions. We feel that governments set out the playing field and the rules, and companies then use their entrepreneurial skills to come up with the smartest solutions to these (technical or social innovations). The better they do that, the more growth we can enjoy in a sustainable manner.

For the moment, Asian companies have indicated a broad push towards ESG goals and setting up sustainability frameworks. But support from governments via incentive schemes or standardised metrics will help to ensure that these initial objectives do not fizzle out.

Survey results shown in the chart below suggest that support from Asian governments for environmental issues such as renewable energy programmes, electrification of transport, sustainable materials' use and carbon taxes was only modestly higher compared to that of European and US governments. However, Asian governments gave relatively less emphasis or support to other social issues such as social housing, access to healthcare and social inequality. At first glance, it looks like governments across Asia-Pacific favour more support for environmental issues compared to social issues.

We'd suggest further research before accepting this conclusion. What we do think is clear is that government support for the push to ESG will be crucial in expanding corporate efforts.

China's pledge together with the other net-zero targets sets the bar for other countries in the region

There was not much of a push towards sustainability in Asia in governments' fiscal response to the Covid-19 pandemic. But since then, a number of governments in the region have made more solid policy announcements.

China, for example, followed up on its 2060 net-zero carbon pledge late last year with further policy announcements at the latest Two Sessions meetings. China's 2060 net-zero pledge is credible, though ambitious, and builds on similar pledges from two of the other big economies and polluters in the region, Japan and South Korea. China's pledge together with the other net-zero targets sets the bar for other countries in the region. In other words, if China can achieve this, then really, everyone can.

One other outcome from the survey (which is more straightforward to accept) is that Asia-Pacific investors, on the whole, are not yet demanding portfolios free of the most polluting firms as they are increasingly doing in Europe. At the moment, maximising returns is possibly still the key objective for investors, regardless of the underlying activity of the firms in question.

Asia-Pacific investors are not yet, on the whole, demanding portfolios free of the most polluting firms

The Longitude/ING survey shows some interesting trends describing why firms are undertaking their sustainability efforts. Companies across the globe appear to have a similar emphasis on the cost motivation for sustainability, with companies citing “Achieve savings/cut costs” and “Improve resource efficiency” as two key motivations for their efforts.

However, we notice some differences as well with US-based firms highlighting “Living up to corporate social responsibility”, “Respond to changing investor demands (for ESG)” and “Create new commercial opportunities” as their top three motivating factors for the push to sustainability.

For European firms, the motivation that stood out was to “avoid reputational risk/improve brand reputation” given that chasing sustainability efforts is widely accepted and possibly even expected of firms based in Europe.

Firms in Asia cite “Meet sustainability criteria” and “Drive product innovation” as their main motivations, and more often than their counterparts in Europe and the US.

This doesn't deny the existence of a concerted push by firms in Asia to adhere to their sustainability frameworks but suggests that such frameworks may be less driven by outside investor perceptions and requirements than their peers in Europe or the US. That said, the differences between regions are not big, and we would not want to inflate their statistical significance.

Other survey data also supports our hypothesis that Asia is still in transition towards integrating ESG into its operations as firms in the region work to set up sustainability frameworks aided by government support for select initiatives. One area that Asia appears to still lag is in utilising sustainable finance as a means to raise capital. Substantially fewer companies in Asia claimed to be doing this compared to companies in both Europe and the US.

One area that Asia appears to still lag is in utilising sustainable finance as a means to raise capital

In the coming years, we can expect more focus on sustainable finance from companies in Asia with the survey highlighting a substantial number of Asian companies (52) planning to do this in the future. We can only expect an increased number of capital raising exercises to be geared towards ESG as more companies in Asia successfully set up their sustainability framework and government support for these initiatives continues.