Fidelity: Webcast: Sustainable investing in Asia

Key points

• While we have observed that ESG disclosures are certainly improving, there is a lack of standardised disclosure across companies in Asia which can be a key challenge.
• Engagement is an ongoing, multi-year effort. Making progress on ESG requires consistent engagement at the right levels.
• ESG-related regulation is increasing across the region, with some local variances when it comes to design and implementation of regulation.

ESG adoption in Asia 

To say ESG is in the “early stage” of adoption is probably unfair, but “earlier” than some other developed markets is a fairer characterisation.

Earlier this month we launched a report entitled ‘ESG priorities in China: How companies in China are approaching ESG’. The report surveyed 262 executives from publicly listed companies in China. Key insights from the report include: 

• Levels of ESG adoption and awareness are robust among listed Chinese companies, although still lagging their Western counterparts. Fifty-three percent of surveyed firms claim to have announced an ESG, sustainability or corporate social responsibility (CSR) strategy and 71% employ staff dedicated to implementing ESG goals
• The need to meet customer and, separately, investor demand were cited as the number 1 and number 2 reasons for driving increased ESG disclosure.
• There will likely be convergence in ESG goals between Chinese firms and their global counterparts in the future. While not the top priority areas for current action, climate change and gender diversity on company boards were listed by respondents as leading priorities for future action.

Analyst approach to ESG

While we have observed that ESG disclosures are certainly improving, there is a lack of standardised disclosure across companies in Asia which can be a key challenge. 

For example, we are seeing many Chinese companies disclosing data around water usage, energy consumption and other important metrics, but few set improvement targets and those that do tend to adopt different bases for the related KPIs, including regarding time periods for meeting targets and measurement. This makes sector-wide comparisons challenging. 

The social element of ESG is another area of challenge. Most companies disclose data around employee benefits and diversity and inclusion as talent attraction and retention are very important cross-sector. However, there is less disclosure around, for example, whistleblowing, compliance, anti-corruption training and responsible marketing. We have sought to engage with these companies to help them understand the importance of disclosure on these topics and what really matters from the point of view of investors. 

Our approach to ESG research 

At Fidelity, we place a high degree of importance on collaboration between fundamental and sustainable research analysts. They work very closely together to really understand what is happening on the ground and our local presence enables us to understand ESG issues in the local context. Given our long-standing relationships across the region, we also tend to have “a seat at the table” when we engage, with good access to senior decision-makers and non-executives.

Through engagement we can provide valuable inputs to the companies in which we invest with a view to helping facilitate positive change. 

For example, we have lent our weight and support to the appointment of the first female director on the board of a market-leading Chinese business.

We have also worked closely with senior management teams to help some of our Asian holdings to enhance specific areas of disclosure and to improve their overall positioning and direction of travel on ESG. Engagement is an ongoing, multi-year effort. Making progress on ESG requires consistent engagement at the right levels.

Evolving regulation

Since 2016, ESG-related regulation in Asia has roughly doubled and we are seeing some common ESG regulatory themes across Asia including:

• Green taxonomies —classification systems around what is and is not sustainable — have been among the first areas to be developed.
• Climate reporting is generally TCFD-aligned and there is a strong sense that Asia is catching up rapidly to the adoption of science-based targets.
• Carbon pricing and trading is growing in some markets, notably China which has the largest carbon credit trading market globally.
• Supply chain due diligence is on the increase, for example, we have seen the introduction of modern slavery legislation in Australia.

Overall, it is evident that regulators in different Asia jurisdictions are moving at different speeds and with different approaches to design and implementation when it comes to ESG regulations.

ESG transformation in Asia

It is hard to pinpoint an individual transformation, given the pace and breadth of change, but we would highlight firstly the policy drivers in China. Coming straight from the top — for example, around carbon neutrality and common prosperity/anti-poverty which are having far-reaching effects across the board, including on China’s substantial state- owned enterprises. Secondly, the governance-enhancement which is broadly in response to greater scrutiny and more activism, as we have seen in Korea recently.

Important information

This information is for investment professionals only and should not be relied upon by private investors. Investors should note that the views expressed may no longer be current and may have already been acted upon. Changes in currency exchange rates may affect the value of an investment in overseas markets. Investments in emerging markets can also be more volatile than other more developed markets. Reference to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. Funds that focus on securities of companies which maintain strong environmental, social and governance (“ESG”) credentials may result in a return that at times compares unfavourably to similar products without such focus. The status of a security’s ESG credentials can change over time.