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Asia faces up to ESG challenges

12 January 2017


Japan has progressed the most in the past two years, according to research by MSCI

Read more: MSCI stewardship sustainable investing Bank of Japan

Asia is lagging behind Europe when it comes to sustainable investing and stewardship several issues need to be tackled during 2017 to achieve global standards, according to a new report by MSCI ESG Research.

Despite six Asian countries that developing stewardship codes since 2014, "the hard part starts in 2017," the report reads.

As Asian institutional investors explore what it means to be active owners in promoting sustainable growth, they will increasingly face two main challenges according to the report: "The challenge of short- vs. long-termism, and the structural social and environmental challenges specific to each Asian market."

MSCI identified Japan as the stand-out performer in Asia, having potentially progressed the furthest in the past two years. In a survey conducted by Japan’s Government Pension Investment Fund (GPIF), the world’s largest with $1.2 trillion in assets, just over 60% of the fund’s companies reported changes in their interactions with GPIF’s managers.

Despite this development, tension remains between the short-term compliance mentality of investment managers versus the long-term goals of asset owners. Short-termism may be winning, MSCI reports. The volume of share repurchases among Japanese companies has increase to JPY5.1m as of September, up 24% from June 2015, suggesting pressure on companies to raise returns on equity.

Meanwhile asset owners that aim to promote sustainable growth over the long term have few means to differentiate among investment managers who view engagement as a mere box-ticking exercise.

Macro difficulties

Investors who promote stewardship in Asia also face the challenge of tackling macroeconomic issues. Japan in particular faces a looming scarcity of human capital and a labour force that is projected to shrink by 12% in the next 10 years.

Further, the number of females in management positions in Japan was as low as 2% in sectors including energy and materials, as of July 2016.

Institutional investors are starting to notice, hence the Bank of Japan created five exchange-traded funds (ETFs) in 2016 aimed to specifically invest in companies with plans to invest in physical and human capital.

Active ownership

Investors in Japan are unsure on whether to view stewardship as a formality or to view it as a shift in their engagement practices with companies to help create value over the long term.

Similarly, Taiwan, Malaysia and Hong Kong will have all adopted stewardship codes that put the concept of active ownership on investors’ agendas. Taiwan’s Bureau of Labor Funds recently committed $2.4 billion to socially responsible investments.

"While a change in mind-set among institutional investors and companies may take years, 2017 should be a year of ferment and discovery across Asia about what is takes to create value sustainability over the long term."


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