Environmental, Social and Governance (ESG) scoring in Asia: It has just started and it is already leading the world

18th May 2020

One of the most significant developments in the field of financial asset management in recent years has been global investors’ demand for an increased focus on ESG issues. In the first quarter of 2020, according to Morningstar, ESG focused funds received worldwide USD 45.6 billion of inflows when the overall fund industry faced USD 384.7 billion of outflows.

However, when it comes to thinking about ESG, it is still presumed that the performance of the Asian corporates continues  to  materially lag their European and North American counterparts. This simplistic view has, to some extent, obstructed the role out of ESG dedicated products in Asia on the assumption that companies in the region are  “not yet ready”. 

We decided to look deeper into these statements. Based on some initial findings we believe the assumption that Asia is immature on ESG matters is both over simplistic and not entirely justified. On the contrary, quantitative screenings show that huge progress was made in recent years, positioning the region on the cusp of a dramatic growth for this emerging asset class.

One historical hindrance to ESG growth, both in developed markets and in Asia, has been a lack of standardization. Certainly the plethora of data providers continue to take very different approaches to these studies. Nevertheless the situation is improving month after month, both in terms of the breadth of information providers and the degree of data visibility. For our own quantitative analysis, at JK Capital we focus on four different ratings coming from data providers that make their findings available to the general public :

• ESG Disclosure Score by Bloomberg – This score provides analysts with information as to the level of disclosure provided by any company on ESG matters. In other words it does not provide an ESG rating per se, but it indicates whether a company is good at disclosing the information needed to form an opinion as to its ESG profile. Of course, the idea behind this score, which can be debunked, is that the more a company discloses, the more likely it will try to improve its ESG profile.
• ISS Governance score – ISS is rating the company’s governance practices. We like this indicator as it derives from the assumption that environment and social corporate behaviours derive from the corporate governance of a company. Having an indicator that focuses exclusively on corporate governance fits well our investment philosophy.
• RobecoSAM Sustainability Score – This rating provided by RobecoSAM (now part of Standard and Poor’s) is based on their own Corporate Sustainability Assessment.
• Sustainalytics Rank – Sustainalytic assigns an environmental, social and governance ranking to companies relative to their industry peers.

Of course by taking different approaches to the ESG rating process, the scores produced by different service providers may not be in line with each other. However, we believe that aggregating scores from multiple sources provides a rigorous and complementary analysis of the different dimensions of a company’s ESG performance. The outcome provides us with an excellent initial quantitative basis for filtering the market in order to identify investment opportunities that fit our own ESG criteria and that merit subsequent deeper due diligence.

Taking this approach we assessed ESG score dispersion of over 55,000 listed corporates across the world’s 75 largest economies and found that 11,712 equities worldwide currently gets at least one rating from the above-mentioned ESG coverage providers. In other words, only 21% of listed companies in the world currently receive an ESG score by these providers.

In Asia ex-Japan, the coverage of listed companies is even lower at just 15%, or 3,694 companies. This is all the more significant that Asia ex-Japan accounts for a massive 44% of the world’s total number of listed companies.

By adding Japan, Asia accounts for more ESG scored companies – a total of 5,817 – than the US and Europe combined. 

To put things further into perspective, among the top 10 countries with the most ESG scored companies, two are from North America (USA with 3,249, Canada with 320), only one is from Europe (Great Britain with 397) and all others are from Asia-Pacific (Japan with 2,123, China with 1,152, India with 667, Taiwan with 450, Australia with 387, Korea with 379 and Hong Kong with 204).

On a country by country basis the ESG coverage of Asia is uneven. However it is striking that key markets such as Japan, China, Taiwan and Australia all have an ESG coverage of their respective markets in excess of 20%, outperforming Canada (9%), Germany (15%), France (17%) and Switzerland (19%). 

In terms of the actual ESG score, the pattern is somewhat more stereotypical with Europe and North America receiving average ESG scores of 4.74 and 4.55 respectively, significantly outperforming Asia (3.45) and other emerging markets (3.00). However we believe the improving coverage is a first step to seeing improved scoring as more and more companies realize the benefit of publicizing good quality ESG data.

The conclusion to be derived from this analysis is that Asia is an extremely deep market (44% of all listed companies in the world are in Asia), it already has 7 countries out of the top 10 with the largest number of ESG rated companies, and still, only 14% of Asia-listed companies currently have an ESG scoring. One can derive that the investment universe for Asia focused investors with an ESG-driven mindset will likely grow very significantly going forward. We can also anticipate that a fast-increasing number of Asian companies publishing ESG data will lead to average ESG scores across Asia catching up on those currently observed in developed markets as Asian companies are feeling the heat from an increasing number of ESG-focused fund managers.