Environmental, social and governance (ESG) criteria are increasingly shaping the global corporate agenda. ASEAN presents a range of ESG opportunities: green infrastructure will boost ‘E’ developments; alternative financing will support ‘S’ impact; and enhanced ‘G’ collaboration could facilitate a coordinated recovery from the worst economic consequences of the pandemic.
ESG standards are used by investors around the world to evaluate potential investments, as well as to enable business leaders to formulate responsible and sustainable corporate strategies, as OBG has recently outlined.
There is growing recognition that the adoption of ESG principles not only generates positive publicity and enhances a company’s reputation, but also creates real shareholder value and opens up new capital access opportunities. According to global investment management company Fidelity International, ESG-rated stocks and bonds outperformed their competitors over the first nine months of 2020 and were less vulnerable to the risks associated with market volatility.
Within the Asia-Pacific region, a survey conducted in September 2020 by global investment research firm MSCI reported that 79 per cent of respondents had significantly or moderately increased their ESG investment as a result of Covid-19. Meanwhile, 60 per cent of the region’s investors plan to incorporate ESG into their investment analysis and decision-making processes by the end of 2021.
‘E’ infrastructure developments
COVID-19 has highlighted the relationship between the health of communities and that of the environment, as well as underlining the importance of green space in areas with high population density, as secretary-general of the Eastern Economic Corridor Office of Thailand, Kanit Sangsubhan told OBG in June last year.
In light of such considerations, ASEAN is increasingly focused on green infrastructure developments as a way to drive a sustainable recovery from the pandemic.
“Governments across ASEAN are gradually shifting their policy focus from economic stabilisation to recovery and long-term growth,” Group CEO of Meinhardt Group, Omar Shahzad told OBG. “Alongside efforts to address the region’s broader infrastructure deficit, we are seeing rising interest in affordable housing and sustainable, green projects.”
Green bonds are an appealing finance instrument for such projects, and the region is well represented in the global green bond ecosystem: of the 58 countries to have issued a green bond so far, 15 are in the Asia-Pacific region, according to the Asian Development Bank Institute (ADBI).
The first green bond to be issued in ASEAN came from a Philippine geothermal company – for a US$226m renewables project in early 2016 – and Indonesia, Malaysia, Singapore and Thailand have since followed suit at the corporate and government level.
These green bonds have predominantly been channelled into green building developments (43%), according to the ADBI, while energy projects have received around one-third of the allocation. This trend is specific to the region: globally speaking, such bonds have primarily been used to fund energy projects (38%), with green buildings accounting for just 18 per cent of the total.
‘S’ impact commitments
ASEAN authorities acted swiftly to address the socio-economic implications of coronavirus, with all 10 members releasing at least one stimulus package by the end of April 2020. Many of these targeted priority areas that fell within the UN’s Sustainable Development Goals.
Alongside short-term relief measures, all bloc members took steps to protect vulnerable socio-economic groups over the longer term. Among these, Singapore introduced incentives to promote employment, such as job support schemes and training grants to upskill workers in affected industries; Vietnam launched a finance scheme for small and medium-sized enterprises; and Brunei, Cambodia and Laos facilitated loan restructuring.
In some cases, this pandemic-related focus on social impact translated into greater emphasis on the ‘S’ element of ESG. Over one-third (36%) of global respondents to MSCI’s survey wanted ‘S’ to comprise a larger proportion of the ESG mix in 2021 – with some reporting the pandemic-related reassessment of inequality to be a key factor.
‘S’ needs within ASEAN vary by market and by context.
For instance, enabling inclusive access to Sharia-compliant financing will be imperative for both Brunei and Indonesia, the world’s most populous Muslim nation. Malaysia could serve as a regional model in this: the country was global leader for sukuk (Islamic bond) issuances in 2020, with 32 per cent of the total value, according to global credit rating agency Moody’s, which expects Malaysia to remain in pole position this year.
Meanwhile, in an early indication of its commitment to the twin pillars of ‘E’ and ‘S’, it was Indonesia that issued the world’s first sovereign green sukuk in 2018.
‘G’ reporting standards
As companies increasingly view their investments and business activities through the ESG lens, governance will to some extent grow organically. The very act of producing an ESG report – or even a report focused solely on one of the three components – inevitably enhances accountability and transparency.
The region’s stock exchanges already require or recommend ESG disclosures.
The Stock Exchange of Thailand was ninth in a global ranking of exchanges based on sustainability disclosure – released by research firm Corporate Knights in 2019 – putting it six places ahead of the London Stock Exchange. Meanwhile, Bursa Malaysia ranked 22nd and Singapore Exchange 24th, both placing considerably above the New York Stock Exchange (40th).
However, the absence of common, international standards can limit a country’s ability to strengthen governance: a lack of measurable, comparable data often constitutes the biggest hurdle to assessing, and thereby enhancing, progress in the global ESG ecosystem.
Within the bloc, efforts are under way to start addressing this substantial challenge.
For instance, in 2017 the ASEAN Capital Markets Forum (ACMF), which brings together securities regulators from all 10 members of the bloc, launched regional standards based on international frameworks to guide the issuance of green bonds, followed in 2018 by standards for both sustainability bonds and social bonds.
ESG is the ACMF’s development focus for 2021-25 as the organisation aims to facilitate sustainable growth across the region’s capital markets.
Thus, the bloc has demonstrated a clear, collective commitment to ESG. Driven by green infrastructure developments and an expanding alternative financing ecosystem, enhanced coordination could help ASEAN businesses, investors and communities realise the full potential of an ESG-enabled recovery from COVID-19.