ESG-focused fund inflows into Asia are growing, but investing is replete with risk given the region’s diversities and historical inequalities. The lack of universal standards and conflicting development goals among regional governments mean that investors can’t copy-paste their global knowledge, but must develop a more bespoke approach, writes Reema Bhattacharya
Mainstream thinking on the environment and investment has markedly shifted in the space of the past 12 months. Global inflows into environmental, social and governance (ESG) funds reached USD80.5 billion in the third quarter of 2020, with ESG funds in Asia witnessing an inflow of more than USD8.7 billion, and set to grow at a similar pace in the years ahead. US-based Fidelity Investments reported that companies with the highest ESG performance scores had the best financial records in eight of the past nine months.
These figures indicate a shift from the perceived wisdom of recent decades that paying closer attention to ESG issues comes at the expense of a company’s bottom line. Rather, decision-makers now recognise that engaging with a range of ESG issues is crucial to future economic health, not a drag on it. The natural next step would be for governments to implement consistent targets and transparent policies that facilitate sustainable investing. But in Asia’s emerging markets, many with opaque regulatory environments and politicised reform programmes, ESG investment is far from straightforward.
Never a more complicated time
Markets such as China, India, Indonesia and Vietnam have built their value proposition as the world’s factories on the foundation of low-cost manufacturing underpinned by cheap, abundant labour and weak environmental and social protections. Therefore, it is hard to imagine how responsible investment principles could be quickly adopted in the region without a fundamental rethink of what constitutes wealth and value.
In the short term, such an exercise is likely to be unappealing for many crisis-stricken governments, particularly in South and Southeast Asia, which have seen decades of poverty alleviation and socio-economic progress wiped out by the covid-19 pandemic in a few short months. Leaders are more likely to reach for familiar tools in a bid to boost industrial investment and jump-start job creation, such as further easing of workers’ legal protections and corporate governance standards.
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Reema Bhattacharya is a Senior Analyst in Control Risks’ Singapore office. She advises clients on key ESG, political, security and regulatory risks that may affect their operations and exposure to regulatory enforcement in South Asia. To find out more, visit controlrisks.com