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Emerging Markets Face Mounting Pressure to Target ESG Goals

Pushed by international investors, companies in the Asia-Pacific region increased their focus on environmental, social, and governance issues by more than 50 percent over the past two years.

Companies faced increased pressure from investors on environmental, social, and governance standards amid the pandemic, even outside the countries best known for ESG investing.

A new report by Baker McKenzie, a global law firm, found that companies in the Asia-Pacific region are increasingly incorporating ESG initiatives as part of their strategic planning, due largely to the pressure of international investors.

“The ESG disclosure requirements in various leading jurisdictions in Asia have evolved recently and significantly from a largely voluntary framework to a more stringent ‘comply or explain’ standard,” said Mini vandePol, head of Baker McKenzie’s Asia-Pacific compliance and investigations group.

Of the 800 businesses that the law firm surveyed across nine jurisdictions, 68 percent of the respondents said they’ve embedded the U.N.’s Sustainable Development Goals into their plans, with those in Japan and Australia reporting it at the highest level — 99 percent and 98 percent respectively. The figure came in at 89 percent for companies in Singapore, followed by 83 percent in India and 64 percent each for Hong Kong and Indonesia. 

“Research shows that the SDGs are now more relevant in catalyzing businesses into action than ever,” the report stated. “In 2019, just a quarter of respondents described the U.N.’s goals as central to their planning. Today, that figure has risen by more than half to 39 percent.”

More than 50 percent of the respondents in Australia and Singapore said the pandemic prompted a greater focus on sustainability, while the figure dropped between 20 percent to 40 percent in mainland China, Malaysia, and Thailand. The report attributed the gap to the role of individual governments and the make-up of the industries driving the respective economies. 

In Australia, ESG efforts were already well underway prior to the pandemic, in part due to the country’s strong regulatory requirements on financial reporting. But its approach to banning international travel and enforcing strict lockdowns during the pandemic further concentrated corporate efforts, resulting in a substantially reduced carbon footprint.

The Investor Group on Climate Change, which represents Australian and New Zealand investors with a total A$3.1 trillion (US$2.3 trillion) under management, published a report in August that found 40 percent of respondents — including superannuation funds, asset managers, and sovereign wealth funds — had made portfolio-wide commitments to net zero emissions by 2050. “This could also be the reason why the corporates have made further efforts in reducing carbon emissions over the year,” vandePol told Institutional Investor

On the other hand, the lack of disclosure mandates in mainland China was seen as the culprit behind the lower focus on ESG goals, though this was expected to change. According to the report, China’s government is now emphasizing sustainability and releasing green investment principles in view of its Belt and Road Initiative, a massive infrastructure project it spearheaded in 2013 to connect more than 70 countries across Asia, Europe, and Africa. 

The China Securities Regulatory Commission this year proposed a requirement for listed companies to include an “Environmental and Social Responsibilities” section in their annual reports, which would include disclosing penalties from violating environmental directives, as well as measures taken to lower carbon emissions and help address poverty in rural areas. 

On the social front, another issue in China is linked to ethical investments and human rights violations. “Investors should be aware of investing in companies subject to sanctions,” said vandePol, who pointed to a recent report by Hong Kong Watch, a human rights watchdog, which found two Canadian pension funds invested in Chinese companies with ties to the Myanmar military junta. 

According to vandePol, given that more than 200 mainland Chinese companies are listed in Hong Kong, the city is playing a key role in familiarizing corporates with tightening ESG requirements, including through listing rules on its exchange. “The main pressure for companies to comply with ESG requirements stem from the international investor community itself — the financial implications, as opposed to regulatory pressure,” she said.

In Japan, the pressure is coming directly from the state, which aims to reach carbon neutrality by 2050. In 2015, Japan’s Government Pension Investment Fund, the world’s largest pension fund, signed onto the U.N.’s Principles for Responsible Investing, and it has put ESG at the core of its investment strategy for the last four years, vandePol saidd. “This has put pressure on the industry to follow suit in pursuing sustainable development goals through investment decisions,” she added. 

According to Baker McKenzie, one of the main litigation and regulatory risks associated with ESG today is the practice of greenwashing, in which companies and funds make misleading claims about their ESG performance. 

These issues need to be addressed with protocols that validate statements and that ensure sustainability and ESG risks are structured as part of the investment process, which includes ESG assessment and due diligence, according to vandePol. “Effective due diligence needs to go beyond a desktop or data room review and should incorporate appropriate financial transaction testing and management interviews,” she said. Regular reviews and audits surrounding key areas of ESG risk exposure are also crucial, according to vandePol.

In terms of industry sectors, technology, media, telecom, health, and life sciences companies were seen as the most likely to focus on sustainability in the wake of the pandemic, as their operations were better positioned to navigate its disruptions, and thus had more bandwidth to focus on long-term ESG goals.

The opposite was true for the energy, mining, and infrastructure sector, which had a less straightforward path in managing the hurdles of the pandemic. These industries were also heavily regulated on the ESG front prior to the pandemic, so Baker McKenzie did not expect focus on sustainability to increase significantly as a result.

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