ESG trends in APAC: Growing demand and top metrics

Globally, support for sustainable investing is growing at a rapid pace and the number of regulations encouraging environmental, sustainable and governance (ESG) principles is multiplying. While Europe currently has the strictest ESG protocols in place, there is also a growing movement to formalize ESG policies and practices in APAC.

As opposed to implementing<span/> legal requirements, as seen in Europe, the HK Securities and Futures Commission (SFC) has recently introduced voluntary guidelines. Last September, the SFC announced its strategic framework to contribute to the development of green finance in Hong Kong. In April 2019, the SFC issued a circular to provide guidance to management companies of SFC-authorized unit trusts and mutual funds on enhanced disclosures for SFC-authorized green or ESG funds.

APAC investors increasingly collecting ESG metrics

Reflecting a growing appetite for the incorporation of ESG elements in APAC markets, it's notable that general partners (GPs) are signing with the UN's Principles for Responsible Investing (PRI) at a faster rate than limited partners (LPs). A major obstacle for LPs is the amount of disclosure and reporting obligations necessitated.

"ESG readiness will increasingly become a competitive issue for GPs in the region, as compliance with high ESG standards becomes more important for large long-term asset owners around the world," said Mikio Kumada of LGT Capital Partners (Asia-Pacific) Ltd. "That's a big part of why we have been talking more frequently with GPs about ESG recently."

At IHS Markit, we recently surveyed GPs on the topic of ESG investing trends in APAC and found some interesting results, as highlighted below:

• Over two-thirds of participants reported that they are currently collecting ESG metrics using either their own internal processes or third-party vendors.
• The main motive to adopt ESG practices cited was to address LP demands, with 75% of participants citing this as the primary driver.
• Differentiation and driving value were also stated by a minority as the key drivers - numbers which may potentially grow as the value of ESG investing is increasingly recognized in Asia-Pacific markets.

We recently published an article discussing research, linking financial performance with ESG practices. These insights may well provide further impetus for the development of a more mature ESG market in the APAC region.

Top 10 ESG metrics for PE fund investors

The increased focus on ESG is not without challenges. While organizations such as PRI and the Institutional Limited Partners Association (ILPA) have developed ESG guidelines, there is no single global standard for GPs to follow.

In our own surveys of private market participants, including multi-strategy groups, institutional advisors and fund of funds, we confirmed that while investors are prioritizing ESG, GPs and portfolio companies struggle to identify, collect and report relevant data. Nevertheless, we found consistency among LPs on which ESG metrics are typically most relevant to due diligence and investment oversight processes.

The top 10 ESG metrics commonly sought by PE fund investors surveyed in the US and Europe are:

1. ESG Policy: The presence of a formal ESG policy provides a valuable starting point for conversations between investors and the management team of the portfolio companies or fund.
2. Assignment of ESG Responsibility: The distribution of responsibility within the management team of a portfolio company or fund can indicate the level of ESG integration across the organization.
3. Corporate Code of Ethics: The presence of a formal code of ethics indicates a foundational process to guide management and employees as they carry out organizational objectives.
4. Presence of Litigation: Any litigation, specifically that related to environmental, social and ethical affairs, typically requires disclosure to investors to allow an assessment of the wider risk profile.
5. People Diversity: Diversity among employees, board members and management promotes a wider range of perspectives in decision-making processes and organizational management.
6. Net Employee Composition: Examining workforce management, including the ratios of part-time and contract workers, gives investors visibility into the way the management team allocates a key component of the organization's budget.
7. Environmental Policy: The presence of a formal environmental policy provides insights into a management team's ability to monitor and address the environmental costs of the organization's office or facility practices, product and service development and delivery and post-use impacts.
8. Estimation of CO2 Footprint: The ability to estimate the organization's direct and indirect emissions, including those produced by the wider value chain, indicates management's efforts to formalize their environmental policy through quantifiable metrics that correlate with a leading environmental indicator.
9. Data and Cybersecurity Incidents: Data management processes can put the organization at considerable risk. Management needs to demonstrate a track record of transparency in reporting all incidents and their potential legal impacts.
10. Health and Safety Events: While management is responsible for providing products and services to customers, it is also responsible for providing safe working environments for employees, contractors and the wider value chain. This can be measured through accident and incident rates.

Interestingly, according to our latest research, the most important ESG metrics in APAC vary slightly from the priorities specified among US and European investors. Among APAC survey participants, priority ESG metrics were designated as: environmental policy, ESG policy, people diversity and health and safety events.

IHS Markit provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.