APAC’s Race to the Top
Policy support for sustainability and governance is paving the way for greater corporate engagement, says Yvette Kwan, Executive Advisor at ASIFMA.
Shaking up existing stewardship practices can take time, especially when the current approach is so deeply embedded. But regulators in APAC want to improve things as they seek to attract fresh capital to the region.
Many countries in Asia already have stewardship codes in place, including Japan, Singapore, Hong Kong and South Korea. However, Asian investment managers still fall short when it comes to holding portfolio companies to account, including on material sustainability-related issues.
More than 60% of Asia-based asset managers (8 out of 13) received a D or E grade for the quality of their responsible investing policies and practices in a global ShareAction survey, and none were graded higher than B. By comparison, the top 10 positions of the rankings table were taken up by European managers, with only 15% of these (6 out of 39) graded D or E. US asset managers also fared better than their Asian peers, although only just.
However, a strong commitment from APAC policymakers to promote the region’s sustainability agenda could lead to improved investor engagement with companies.
“Corporate governance reform goes hand in hand with stewardship. These are the necessary ingredients before you can effect shareholder activism,” said Yvette Kwan, Executive Advisor at Asia Securities Industry & Financial Markets Association (ASIFMA).
ASIFMA is a trade association that supports the development of capital markets throughout APAC. Kwan joined the association in 2019 to help asset managers in the region deal with the increasing amount of sustainability-related requirements they are facing from regulators.
“We see investors increasingly focused on corporate engagement so this will be a big theme in the year ahead,” said Kwan.
Adding value
Last year South Korea announced a corporate value-up programme to help boost the value of its listed companies. This involves the introduction of measurements to strengthen corporate governance and improvements to the country’s stewardship code.
Earlier this month South Korea’s regulators launched a new task force to revise existing guidelines for asset managers to exercise their voting rights. Korea’s value-up programme is inspired by a similar initiative in Japan.
“Every market, every listing venue is wondering how to attract funds at the moment. It’s a competitive market,” said Kwan. “Where there is more work that needs to be done in improving sustainability disclosures, or where certain issues (for example, labour practices) are not being adequately addressed or not well understood, there may be some reluctance from international investors to invest.”
Kwan added that international players need to be able to align their global positioning with local requirements, and may be limited by their home regulations or investment mandates.
“Being able to navigate local idiosyncrasies is very important, and regulators in the region are very aware of this,” she said.
In a speech in January, Kelvin Wong, Chairman of Hong Kong’s Securities and Futures Commission, stressed the importance of strong governance for the territory’s continued status as an international financial centre in the region.
Although mainland China doesn’t yet have a formal stewardship code in place at the moment, global investors, such as Fidelity International, have been calling for one. Kwan said that Beijing appears to have taken note of such sentiments, although she doesn’t think that the introduction of a formal code will be on the cards anytime soon.
All of this means that the direction of travel in APAC is dependent on developments elsewhere in the world, especially in the US and Europe.
With the US rowing back on its climate commitments and the European Union potentially weakening core legislation on corporate sustainability disclosure as part of its forthcoming omnibus package, there is a danger that international pressure in the region might lessen. But Kwan remains optimistic.
“There’s always a geopolitical overlay on top of sustainable investment decisions, but despite what’s happening in the US, we see that the commitment in APAC remains strong,” she said.
Accounting standards
Over the past couple of years, there has been a big push from regulators and international organisations to roll out International Sustainability Standards Board (ISSB) standards across the region.
According to Deloitte only four countries in APAC have adopted ISSB standards so far: Australia, Malaysia and Taiwan. China, Hong Kong, Singapore and Sri Lanka have finalised the standards, which are now pending adoption. Several others are either still consulting on them or are in the final stages of review: Indonesia, Japan, South Korea and Thailand. Philippines says it is committed to adopting them.
Kwan says the widespread adoption of ISSB standards in APAC is a positive development that will attract more capital into APAC, since the adoption of a common disclosure framework will give sustainability-focused investors a clearer picture of the risks they are being exposed to across markets.
However, she warned about the importance of preventing regulatory fragmentation – something that ASIFMA is very focused on across the whole breadth of its work.
“Clearly, the implementation of these standards will differ between markets, depending on the level of readiness of companies and the impact that sustainability aspirations has on the real economy,” said Kwan. “However, the important thing is to work towards a standardised approach and understand where any differences are emerging.”
Despite this “inevitable tension”, ASIFMA’s has to “try and steer things as much as possible in the direction of harmonisation”, said Kwan.
She held up the example of coordination by the EU and China to harmonise green finance standards, under a Common Ground Taxonomy, as a good example of where national priorities differ but efforts have been made to keep agreed definitions in step.
Kwan said that the more developed financial hubs of Singapore and Hong Kong have had “a robust consultation [on ISSB adoption] process, with proper consideration for industry feedback”. This has helped establish greater consistency between these markets, she said.
“The last thing we want to see is jurisdictions coming out with things that are not standardised and just rely on domestic metrics,” said Kwan.
This could be the case for some of the more emerging markets, she added.
India is a particular concern for Kwan, and a country that ASIFMA is watching closely. Whilst India has joined the International Organization of Securities Commissions’s network initiative to support the adoption of ISSB, there has so far not been any announcement from the the country’s regulators of an intention to update local sustainability reporting requirements for listed companies, which were first introduced in 2021.
“It would be useful if there was a publicly available roadmap to understand the implementation timeline, if any,” she said.
More guidance
A core part of Kwan’s work is supporting asset managers who are having to navigate the different rules that are emerging around green finance. Last year, ASIFMA published a paper offering guidance for managers grappling with these challenges.
“Investors, both asset managers and asset owners, need to strategically align their sustainability positions and objectives with their available resources,” said Kwan. “Investors who just want to be compliant local rules should focus their efforts on this. Investors who have greater aspirations – for example, in terms of their move towards net zero – will need to be able to dedicate appropriate resources towards such goals.”
By offering such guidance, and recognising the diverse nature of APAC’s investment community, ASIFMA hopes to make a valuable contribution to driving the region’s sustainability agenda forwards.
“The intent to invest sustainably doesn’t always translate into the flow of hard dollars into sustainable products. There needs to be a lot more work in educating the investing public and institutions in Asia around the performance benefits of sustainable investment and how this kind of investment can help with portfolio resilience,” she said.
Kwan added that companies in Asia need to move beyond a “tick-box mentality” and focus on more qualitative disclosures as well. At the same time, many markets in the region are still developing and may not be in a position to fully embrace sustainability reporting, she said.
“Should hurdles be put in front of these companies at this stage?” asked Kwan. “A lot of regulators are cognisant of this consideration, making it less likely that we will see the same aspirations in APAC as we see in Europe.”
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