IFC Advisory Services in Sustainable Business 78189 Sustainable Investment in Asian Emerging Markets Issue Brief In partnership with Canada and Japan Introduction To support the growth of sustainable capital flows, opportunities in the market for sustainable investment IFC’s advisory services seek to influence, support and products. While a number of organizations provide this enable capital market stakeholders to better integrate information in developed economies such data is scarcely environmental, social and governance factors (ESG) into available in emerging markets. capital allocation and portfolio management processes, using IFC’s own investment practices as a model. IFC is playing This issue brief provides a comparative overview of the its part to support the growth of the market by funding the state of sustainable investment markets in key emerging development of enhanced stock market indices, financial markets across the Asian region, based on findings from instruments, and through targeted market research. seven Sustainable Investment Roundtables conducted by the Association for Sustainable & Responsible Investment in Compiling data on the state of development of the Asia (ASrIA), with the support of IFC, during the second half sustainable investment (SI) industry is important for global of 2010. This issue brief covers the roundtables in Bangkok, investors and investment managers to understand the Beijing, Ho Chi Minh City, Jakarta, Kuala Lumpur, Manila and Shanghai. Overview notably the Bursa Malaysia and the Shanghai Stock Exchange have played a key role in raising awareness and recently introduced a Many roundtable participants were looking to China for a lead on mix of best practice ESG guidelines, sustainability indexes, sustainability issues rather than towards Europe, North America or awards and specialist market services. Additionally, more specialist Australia /New Zealand. The growing dominance and leadership service providers, such as ESG research and ratings providers, are by the Chinese economy and the ‘green’ emphasis of the Chinese establishing themselves in the regional market. stimulus packages at the time of the recession are some reasons behind this. There was also strong interest by participants in cross- More tools, information and momentum around sustainable regional insights. investment, therefore, indicate that a platform is being developed which could support strong growth in adoption of sustainable A clear finding of the roundtables was that though awareness of investment, and support the shift to more sustainable economies in ESG issues and the concept of sustainable investment is quite broad the region over the coming decade. across the financial services industry, it is still early days in terms of practice in Asian emerging markets. There is, however, a foundation for rapid future growth in adoption of sustainable investment across ESG Integration the region. The roundtables showcased an increasing number of financial An increasing number of regional financial institutions are alert to institutions paying attention to sustainable investment in terms of sustainable investment issues and even integrating aspects into their integration of ESG issues into active investment policy. The picture, wider investment policies. With awareness of sustainability issues however, is variable. Some global financial institutions, in particular generally very high across the region, this trend is likely to continue private equity investors, are conducting ESG due diligence, or gathering pace. contracting third parties to conduct ESG due diligence, as part of their investment assessments. Thus, there is distinct growth in Some distinctions are evident between global players which consultancies getting business to conduct ESG due diligence in the are starting to allocate more resources into building specialist region on behalf of financial clients. sustainable investment teams in the region or subscribing to third party research and rating services. Regional financial institutions Discussions further indicated that some regional sustainable tend to rely more on the knowledge of their fund managers to apply investment funds have adopted standard global ESG screens and screens on environmental and social risks, for example. others have attempted to devise screens they felt were more relevant to the Asian context. Regulatory authorities have been requiring enhanced ESG disclosure by companies, while increasing numbers of regional There has been variable progress in developing engagement financial institutions have been signing up to initiatives such as the strategies. Fund managers were typically not sending out ESG Principles for Responsible Investment (PRI), and joining industry related questionnaires to companies or actively engaging with associations such as ASrIA. A number of regional stock exchanges, companies on ESG related issues, but applied the screens based on 2 Sustainable Investment in Asian Emerging Markets their own knowledge of companies. Though several participants in In Shanghai and Beijing, there were discussions on the distinction the roundtables claimed that they practiced engagement and many between Western and Asian values and on the potential for a noted this on questionnaires passed around prior to the events, few distinct Asian approach to sustainable investment. Simply adopting provided details on how they conducted engagement. or implementing a Western approach that does not incorporate the Asian cultural or value system in the process may not be effective. There has been a significant increase in the number of ESG research, information and ratings providers actively focusing on Asian emerging At the events in Jakarta and Kuala Lumpur, there were quite markets, culminating in the set up of new firms or the establishment vigorous discussions on what policies to adopt with respect to of regional satellite offices. Leading financial media have also started investment in controversial sectors and the distinctions between to provide ESG information services to their subscribers. perceived global and local perspectives on these issues. There were differing approaches on how to engage with controversial sectors Both global and regional investment institutions, therefore, have between local and global offices of investment institutions, and it access to third party assistance and advanced ESG investment tools. was recommended that global offices should have active dialogue Reference to ASrIA’s portal of sustainable investment funds, which with their regional counterparts in order to gain consensus on such details funds known to adopt ESG practices, shows that many issues. In these markets, there is potential for further growth in globally based funds investing into the region rely on third party Shariah-compliant funds. services for ESG due diligence and ratings. As many global funds rely on third party research and ratings, Asian companies are rarely At the event in Ho Chi Minh City, there was a particularly strong contacted directly by global investors on ESG issues and, therefore, emphasis on, and even sensitivity to, the importance of governance some have received a misleading impression that investors are not within financial institutions and the organizations they are investing taking account of such issues. in or engaging with. An increasing number of global financial institutions are basing Global sustainable investment funds tend to clearly establish their own ESG experts in the region or looking to hire regional talent. Regional value perspectives. However, an observation from the roundtables financial institutions or regional offices of global institutions are was that sustainable investment funds should take time to learn and actively participating in conferences and even conducting in-house understand the values of the countries they are investing into, and training for their staff and analyst teams on ESG related issues. take both sets of values into account. During the discussions it was suggested that funds take a multi-stakeholder approach and stress- However, several regional representatives of global financial institutions test their value screens against regional perspectives. who attended the roundtables noted that they were fully aware of the ESG policies of their head-offices, but that ESG integration and A number of leading Asian organizations have clearly defined and corporate engagement was still relatively new to them. strongly expressed values. In some cases, these values came from founder families considered by some participants as a potential area of In summary, key findings on the state of ESG corporate strength in the Asian context. The value placed on building integration in Asia include: and nurturing relationships (between companies, and between companies and suppliers) was seen as a core Asian strength that may, • wide variance in the adoption of ESG across the region exists; however, be considered a weakness by some investors. For example, • human resources and capital devoted to ESG are becoming Asian companies had been slower than many Western companies to lay more readily available in the region; off workers during the recession and held a strong feeling of obligation • global financial institutions are drawing on these resources; to provide secure working environments for their employees. • regional actors are beginning to consider ESG issues and corporate engagement; and In summary, key findings of the dialogue on values and • regional actors tend to lack capacity and possibly have value approach to investing in the region include: constrained financial resources to draw on ESG tools commercially available in the region. • the majority of participants at the roundtable events were new to the concept of sustainable investment; • participants were interested, but have not yet had an opportunity Value and Values to develop sophisticated models which could reflect Asian perspectives for integration in the investment practice; The issue of values was rarely far from the discussions at the • distinct Asian approaches to sustainable investment are emerging, roundtables. Two key issues were the relationship between value but no clear consensus on what those would be in practice; and and values, and on whether or not there should be a distinctive • greater clarity on distinctive aspects to Asian investment practices Asian approach to ESG. will emerge as more products which take account of ESG criteria are launched in Asia, including indexes, funds and green bonds. Sustainable Investment in Asian Emerging Markets 3 Governance and Branding Future Outlook Governance issues were widely discussed at the roundtables, Learning how other markets around the region are progressing in attracting particular focus at the Ho Chi Minh City, Jakarta, terms of adopting sustainable investment practice and managing the Manila, Beijing and Shanghai roundtables. There was some shift to more sustainable economies made for valuable discussions. discussion as to whether strict interpretation of global governance Many of the regional participants showed particular interest in standards was fully practical and whether there should be some China’s future development and a lead on sustainability issues. progressive introduction of standards into emerging markets. Local regulatory authorities had to play a guiding role in introducing Chinese capital market stakeholders are currently taking a lead role appropriate standards, relying not only on enforcement, but also in the region on a number of fronts, including the implementation focusing on education (e.g. integration of governance into MBA of progressive regulations on a broad range of ESG issues. In programs) and incentive schemes (e.g. public awards). addition, the massive infrastructure investments outlined in current and preceding Chinese Five-Year Plans have been integrated with IFC cooperation with regulators across regional financial markets country-wide sustainability objectives. The Shanghai and Shenzhen to introduce good practice guidelines was noted as a very positive stock exchanges have also been progressive in terms of adopting best initiative. Whether governance should be interpreted more widely practice guidelines, setting up governance and sustainability indexes, to include management of environmental and social issues, covering and investigating the development of regionally relevant ESG criteria. such issues as climate change preparedness and disclosure, disaster preparedness and labor management was also debated. With this impetus from China, institutional investors from around the region are increasingly focused on sustainable investment resulting In summary, key findings of the dialogue on governance in greater interest and awareness of ESG by investment managers and branding in the region include: and service providers. This trend towards greater uptake of more sustainable investment is destined to grow among the fast-moving • progressively more Asian companies are investing heavily into Asian economies. Asian stock exchanges are playing a leading role their brand proposition and reputation. Such investment could be and regulators are setting policy direction in this regard. at risk if company branding is superficial and not based on good governance and responsible management at the board level; • financial institutions need to express stronger value sets to attract more investors and develop sustainable long term relationships with their clients and suppliers; and • companies developing brands outside their home markets require awareness of differing regional and global values in the markets into which they are investing and doing business. Sustainable Investment in Asian Emerging Markets, June 2011 Written by David St. Maur Sheil, Director, ASrIA Edited by: Rebecca Wright, Hendrik Rosenthal, David P. Doré and Kang Yunling of ASrIA, and Berit Lindholdt Lauridsen of IFC. The Sustainable Investment Roundtables were sponsored by IFC in partnership with Canada and Japan. The findings, interpretations, views, and conclusions expressed herein are those of the author and do not necessarily reflect the views of the Executive Directors of the International Finance Corporation or of the International Bank for Reconstruction and Development (the World Bank) or the governments they represent. The material in this publication is copyrighted. IFC encourages dissemination of the content for educational purposes. Content from this publication may be used freely without prior permission, provided that clear attribution is given to IFC and that content is not used for commercial purposes. International Finance Corporation • 2121 Pennsylvania Avenue NW • Washington, DC 20433 USA Tel. 1-202-473-3800 • Email: asksustainability@ifc.org • www.ifc.org/sustainableinvesting 4 Sustainable Investment in Asian Emerging Markets