Schroders Investment Insights - Are Asian companies engaging with ESG?

Schroders, a leading asset manager, emphasizes active ownership and sustainability. They use a three-pronged approach - dialogue, engagement, and voting. In Asia, their engagements focus on climate goals, sustainability, and increasing transparency, particularly with Chinese companies. The key is to set realistic, region-specific objectives.

Active ownership has garnered significant attention in recent times. Fundamentally, it refers to engaging with companies and assets to foster sustainable business practices. At Schroders, they are stewards of client capital and aim to leverage shareholder influence to guide companies towards better sustainability practices, resulting in superior long-term business outcomes and improved investment results for clients.

Their approach to active ownership is three-pronged: dialogue, engagement, and voting. Dialogue is foundational, allowing them to familiarize themselves with companies, foster relationships, and gather critical insights. Through engagements, they undertake targeted actions with a clear aim to drive specific changes in line with their objectives. Meanwhile, voting is a crucial component of their active ownership strategy, enabling them to express their perspectives or drive escalation techniques when necessary.

Asian companies are increasingly engaging with investors

Engaging with companies in Asia presents its own set of unique opportunities and challenges. Typically, they prefer one-on-one interactions for in-depth discussions on sustainability issues. Collaborative engagements through a common interest in pushing for more sustainable practices can be achieved by partnering with industry associations such as the Asia Investor Group on Climate Change (AIGCC). In 2022, 80% of their engagements in Asia were outcome-driven.

There is a common belief that Asia lags in ESG practices, but this oversimplifies the reality. The Asia Pacific region is vast and home to businesses at various stages of their ESG journeys.

The rise of family-owned and state-owned enterprises is a distinctive feature of the Asian business landscape. These concentrated ownership structures may pose corporate governance challenges, but some may argue that these structures contribute to long-term value creation and interest alignment.

Corporate governance and transparency have consistently been at the forefront of their engagements in Asia. Over the years, Asian companies have shown an increasing willingness to enhance transparency, driven by regulatory mandates and investor expectations. Companies are also seeking clearer guidance on areas for improvement, and many view engagement as a two-way knowledge-sharing exercise.

The receptiveness of companies to their engagements has been notably rising, particularly Chinese companies. They have increased both the frequency and number of engagements with companies' dedicated ESG teams to discuss sustainability topics in-depth. The overall quality and depth of engagements are improving in the region. 

Lastly, it is essential to highlight that they prioritize tangible, grounded in reality, and attainable objectives for outcome-driven engagements. This underscores the importance of proper benchmarking and crafting strategies tailored to specific regional context.

Focus areas in Asian engagements

Discussions on climate change targets, emission metrics, and energy transitions are now becoming more commonplace as considerations of national climate ambitions and regional energy transition ramp up in the region. Policy action has been the main driver for such trends.

For example, Chinese companies, mainly State-owned Enterprises (SOEs), have become particularly proactive in discussing their climate goals, likely stemming from the nation's commitment to its 30/60 national target.

Beyond climate considerations, nature conservation, deforestation, supply chain management, and engagements in controversies are gaining traction.

Interestingly, industries with higher ESG risks often showcase better progress. Their data indicates that sectors such as energy and utilities in the APAC region tend to be more transparent about their climate policies and targets.

In essence, active ownership is the deliberate act of engaging with companies to promote sustainable practices. Whether through dialogue, direct interactions, or voting, the overarching aim is clear: to ultimately drive better financial and non-financial outcomes. It is crucial that these efforts not only prioritize what's financially significant but also are marked by clear objectives, measurable milestones, and a deep consideration for regional nuances.