The reason for better ESG practices in Apac is a combination of investor and company awareness, and increased regulation in the region, Miranda Carr, executive director of MSCI Research told FSA.
“Low ESG rated companies in Apac have felt pressure from investors, who want to minimise risk by insisting they adopt more responsible practices,” she said.
She pointed out that the Covid-19 pandemic has elevated their concerns both on environmental and social issues.
Investors want to see that companies are addressing climate change through making the transition from coal-based energy to renewables. They are also paying attention to whether industrial companies are applying the technology to make them more energy efficient as the International Energy Agency has projected that around 30% of carbon emissions can be reduced just by better energy efficiency.
In fact, some of the high-polluting sectors, such as utilities in China and India, and energy in Southeast Asia, have seen marked improvements in their environmental performance during the past three years, according to Carr.
Yet, the greatest progress has been seen in social factors, notably among previous ESG laggards in the consumer discretionary sector in Greater China and South Korea, and the energy sector in China, due to better human-capital management, according to Carr.
Ever since the beginning of the pandemic, investors are paying more attention to how companies treat their workers. The way they conduct best practice in terms of employee working conditions could be a decisive factor in terms of how they retain people and maintain their productivity.
Meanwhile, governments in Asia, including Hong Kong, Taiwan, Singapore among others, have been promoting the adoption of better ESG practices, which means that companies with stronger ESG characteristics are likely to benefit from regulatory support, she said.
In addition, there are indications that companies with better ESG scores tend to generate stronger returns for investors, Carr said.
For instance, the MSCI Asia Pacific ex Japan ESG index has recorded a higher annualised return than the conventional MSCI Asia Pacific ex Japan index from 2014 to 2021, and the MSCI China ESG Indexes has outperformed the MSCI China index from 2012 to 2021, according to MSCI Research.