Gardens by the Bay, Singapore, ESG Integration
  • Sustainability
    • Understanding ESG

ESG Integrated 2.0

  • Article

A deep dive into Asian equities

The focus on environmental, social and governance issues in Asia continues to gather pace. More companies are making disclosures, more regulators require it, and investors are asking more questions.

Rather than assigning scores or ratings, we take an integrated approach that focuses on the issues that are, or will, become material for businesses. It’s hard work, time consuming and frustrating at times.

However, we think this offers a deeper analysis and understanding of how ESG affects the future course of a company, rather than a picture of where it is now. And the relative paucity of ESG information and data in Asia lends itself particularly to integrated analysis and engagement.

Over the past six months we undertook a more in-depth integration exercise. We looked closely at 10 sectors in the region, integrated ESG into almost one-quarter of our Asian equity research coverage, and made changes to many of our company forecasts and valuations.

While each sector in Asia faced its own individual risks, and in some cases opportunities, even within sectors we found different companies were exposed to ESG in their own unique ways.

We also made a number of discoveries along the way:

  • Sustainability strategies – such as transitioning to greener energy production and/or using greener business practices – feature across all sectors. Recently, the formalisation of sustainable development disclosures has forced companies to be even more ambitious in how they link their overall business strategies to the principles of sustainability.
  • ESG transmission into equity share prices occurs both very slowly and very quickly. During 2020, for example, a sharp rise in the share prices of energy transition leaders in the battery space produced unsustainable valuation levels leading to a sharp correction over the past six months.
  • In Asia, ESG-dedicated funds make up less than 5% of assets under management, and are generally passive. However, globally, more funds are linking their investment strategies to sustainable development, and this is starting to concentrate more of the global pool of assets into sustainable strategies.

For us, the journey continues. While this latest ESG 2.0 series of reports is complete for Asia, it is not the end of ESG integration, but just the beginning.

Would you like to find out more? Click here to read the full report (you must be a subscriber to HSBC Global Research).

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