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Asia as the next top spot for investors driving sustainable change

Asia as the next top spot for investors driving sustainable change

  • 06 June 2023
  • By Fidelity International
  • 10 mins read

Asia has been among the top destinations for growth investors in recent decades. Now we believe it could become one of the top markets for investors driving sustainable change. With the right sort of research, engagement and understanding of local issues, sustainability-focused investors can work with Asian companies to improve their ESG credentials, thereby increasing their longer-term return potential.

Two types of ESG investing

Research has shown that robust sustainability practices and improvements in a business’ non-financial factors such as environmental and social aspects tend to lead to higher valuations over the long term.

Investors can seek to capitalise on this tendency in two ways: 1) by allocating capital to existing ESG leaders and 2) by allocating capital to companies making a genuine effort to improve their sustainability and which are open to consistent levels of engagement. In the latter case, investors can often help drive the change — for example, by encouraging greater energy efficiency or better employee safety protocols — which should ultimately lead to more sustainable investment returns.

Asian companies offer scope for big ESG changes

Many Asian companies fall into the second category of those firms seeking to improve their ESG profiles. Based on the distribution of MSCI ESG ratings, Asia excluding Japan has a smaller proportion of companies regarded as ESG leaders than Europe does. (Chart 1)

This creates opportunities, as Asia has a large universe of firms that could benefit from improving their ESG credentials. ESG awareness has been rising rapidly in Asia in recent years, as evidenced in our Fidelity Analyst Survey 2022 where Fidelity analysts have in 2022 continued to see a growing emphasis among companies in Asia Pacific, particularly China, to implement and communicate ESG policies in the last year. Climate change and the COVID-19 pandemic have brought ESG considerations to the fore even in markets where economic growth has been the main priority. (Chart 2)

While Asia has seen unprecedented economic growth over the past 30 years1, lifting hundreds of millions of people out of poverty, another estimated 200 million remain in extreme poverty.

The next phase of economic growth in Asia needs to be cleaner, healthier and more sustainable. Asia accounts for 65 per cent of global mismanaged plastic waste and 22 per cent of annual deforestation2, while at the same time Asian cities face the highest water and air pollution risks such as premature deaths due to ambient air pollution.

Chart 1

Chart 2

Uneven economic development is in part driven by undiscerning capital and ESG investors can help steer the course of the next phase of economic development in Asia to be more sustainable through capital allocation decisions and engagement.

In tackling climate change, Asia plays a significant role in global efforts to achieve net zero. Asia is currently the largest emitter, accounting for more than half of global emissions in 20173. At the same time, almost two-thirds of renewable power built in 2020 was constructed in Asia4, highlighting the potential for change. Asia's low carbon transition needs to continue and accelerate, and green finance will be a key enabler.

Besides the environment, social protection measures in Asia have also increased, and more consumers are voting with their wallets and opting for sustainable products. People are seeking to work for firms that are more aligned with their own values and investors are rewarding good ESG companies with cheaper financing.

ESG due diligence and effective engagement are key

ESG issues are changing business economics in Asia and effective analysis is needed to preserve and enhance alpha when investing. For instance, decarbonisation is rendering certain businesses obsolete while giving rise to new technologies and business models. The growth of the gig economy has brought gig-worker welfare into focus with increasing regulatory and consumer attention leading to higher cost of labour for platform companies. At the same time, tightening data privacy regulations are reducing the revenue potential of internet companies from targeted advertising.

While ESG issues need to be taken into account when investing, finding the companies that really are making ESG improvements is not easy. Greenwashing remains a risk globally and investors need to be able to conduct thorough ESG due diligence that goes beyond a simplistic ranking based on company disclosures, especially as disclosure is not mandatory in many Asian markets and can be patchy.

Once investors have identified the right companies, they can engage with them regularly and offer advice and feedback to ensure that progress on ESG is achieved. Our experience shows that companies are more likely to adopt an ESG suggestion when made in the context of business development. This requires investors to have a deep understanding of the company’s business, its history and future plans, and the people behind it. For those investors who do, and who understand the local context or better yet have a local presence, Asia is poised to be a major market for decades to come in terms of driving sustainable development.

1Source: The World Bank Data (2022)
2Source: OurWorldInData, UN Food and Agriculture Organization [FAQ]
3Source: QurWorldIinData, The Global Carbon Project
4Source: International Renewable Energy Agency

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