ESG investments: Investors moving towards convergence.

With all the interest in ESG recently, S&P held a panel in October at their Singapore office to 1) present their ESG profiling tool, 2) gather panelists' opinions on the state of ESG in Singapore and the Asia Pacific. Here are our notes:

Who was on the panel?

• Susan Gray, Global Head of Corporate and Infrastructure Ratings, S&P Global Ratings
• Lynette Leong, Chief Sustainability Officer, CapitaLand Group
• Eric Bramoullé, CEO South Asia, Amundi — Investment firm, working with largely European markets
• Paul Lukaszewski, Head Of Corporate Debt, Asia And Australia, Aberdeen — Standard Investments
• Anthony Flintoff, Managing Director, Corporate Ratings, S&P Global Ratings (Moderator)

Here’s a quick lowdown on the ESGs:

• ESG stands for Environment, Social, Governance indicators. Introduced and developed in Europe, discussion in late 2019 (after the UN Climate Summit and pressure on Brazil with the Amazon wildfires) has revolved around the fairness/equity of rolling these indicators out as universal ones. Read up on EU Taxonomy discussions here
• Environment, Social, and Governance indicators are all defined differently. It’s a battle of words and fields now, but climate is the hot topic.

Opinions from the panel

• In developing counties where data quality is weaker — ESG may not be about being the best in quality or practice, but about enabling countries to match the needs of these indicators as they develop. I.e. Developing the social aspect for the country/client, not for the indicator
• Investors (e.g. Amundi) see the trend as definitely paying off, are full-in
• Banks (such as Aberdeen) are more cautious
• The Social indicator evolves a lot over time (labor and consumer pressure; social issues and events now are blowing up more quickly and impacting companies)
• Despite the differences in viewpoints and pace of change, the panel agreed that we are seeing Convergence towards change.

So what is the S&P ESG Evaluation tool?

Key Perspectives from S&P’s profiling tool:

• “Asian governments will offer the main regulatory push.”
• On the real estate side, there is interest from the consumer and retailer side; and plenty of government grants in Singapore pushing towards ESG
• ESG is a signal for the rest of the world
• The transition pace will be hard. Transition will focus on how the Social evolves. With Governance: Data privacy security management and controls will get really important as more data is used; whereas Environment and Social indicators will continue to evolve.

S&P’s Strategy is to focus on providing clients with an ESG Evaluation for entities that assesses their operations to observation ESG risks and opportunities, accounting for associated governance structures to mitigate risks and capitalize on opportunities.

It includes a special Preparedness section — preparing the company for ESG transition: anticipating and adapting to disruption through:

• Capabilities: awareness assessment and action plan
• And Embeddedness: decision making and culture (of the company to mitigate risks)

They also leverage existing standards to do so e.g. carbon disclosure project and use High-level overview and component scores to let you dig deeper.

Market not being ready to answer the question of alignment

Paul pointed out in the panel that the framing of the question really matters: Industry is really concerned about the financial perspective and the social factor perspective, and there’s the knowledge that coal is at risk. The cost of generating electricity is now on par with coal-fired power. This is a transition economy that has stranded us at this question, and we are now at a crossroads that is much more than just about saying no to coal.

As for whether to seek out more data or not, Susan Gray mentioned, “Data-based or not — it depends on what you are looking out for and to do.” S&P’s approach, she had said, is to focus on providing context and opinion. Again the panel noted: There are no norms — so convincing investors is a challenge — but there is now convergence. And with that, the green light to develop alternatives.

Who will drive the push on ESG?

Susan Gray: European taxonomy will be influential; S&P started 20 years ago to look at this, and the changes have been unexpected in just 10 years

Paul Lukaszewski: In Asia it will be government-driven; Policymakers need to give a push, and change will come in 18–24 months

Lynette Leong: It will come from the consumer and retailer side; or through government grants in Singapore

Eric Bramoullé: There is a massive base of investor awareness, where recycling becomes part of long-term consumer awareness — at low cost — and savings.

Useful resources

S&P Look Back 1999

Principles for responsible investing:https://www.unpri.org/esg-issues