Investing in Asia: a question of sustainability

Investing in Asia: a question of sustainability. (Photo: Fidelity International)

Investing in Asia: a question of sustainability. (Photo: Fidelity International)

Asian companies have historically lagged behind their European counterparts when it comes to environmental, social and governance considerations. With ever increasing flows of international capital, companies are being held to account for their approach and practices are evolving fast.

So far priority has been given to health and safety, working conditions, and supply chain management, but environmental concerns are fast gaining prominence as the economic and health implications of air pollution in major Asian cities become apparent. Looking ahead, we expect this focus on broader sustainability issues to sharpen as we see increasing international capital flows alongside regulatory initiatives from regional governments.

At the country level, China is leading the way and we have seen a range of policy directives introduced over recent times. The government has encouraged more use of renewables and natural gas in place of coal-fired energy generation, imposed restrictions on vehicle use in major cities, cut excess industrial capacity and even shut down thousands of heavy polluting factories completely.

Notably, from 2020 it will also be mandatory for listed Chinese companies to disclose how they are managing and monitoring environmental factors in their business. This is feeding through to what we are seeing on the ground in our daily dealings with companies.

Shifting attitudes towards sustainability

Attitude shift across the globe on sustainability. (Credit: Fidelity International)

Attitude shift across the globe on sustainability. (Credit: Fidelity International)

In fact, the results from our 2019 Analyst Survey highlighted that the most notable attitude shift across the globe on sustainability was in China – our analysts reporting a growing ESG focus among some or most of their Chinese companies, as it nearly doubled to 63%, from just 33% last year. Alibaba is a case in point, having published its first ever ESG report in 2018, driven directly by senior management.

Our approach to sustainable investing

We believe that when it comes to sustainability, analysing what can’t be modelled on a spreadsheet is as important as what can be. This is underpinned by the idea that a company focusing on its stakeholders in the broadest sense improves the chances of delivering attractive long-term returns.

For this reason, ESG considerations have long been integrated throughout our investment process. Last year we engaged globally with 780 companies on ESG issues, of which 160 were based in Asia.* One example of this is our thematic engagement on human rights protection and responsible sourcing of raw materials with companies in the textile supply chain in Asia. Our investment and ESG teams based in Tokyo, Hong Kong and Singapore use their knowledge of local markets, best practices, and regulatory priorities to complement our direct company engagement.

At the beginning of 2019, we also moved to launch our proprietary sustainability ratings tool, which leverages our bottom-up fundamental research process and deep corporate access to deliver a forward-looking and cross-asset class assessment of the sustainability profile of our investment universe. Each company is rated by our analysts relative to its peers and our framework is designed to draw out specific criteria relevant to the long-term sustainability of each company on an industry and sub-sector basis. The proprietary ratings are available to our investment team as an additional source of insight in our stock selection and portfolio construction process.

The future

The corporate landscape in Asia and beyond will continue to be altered by new business models enabled by technology as well as increasingly demanding customers who can make frictionless switches between competitors. The combination is accelerating the pace of creation and destruction of companies across many sectors. Finding companies with genuine staying power means spending as much time analysing the off-spreadsheet areas that an organisation needs to consider and manage.

Transparency is no longer just a regulatory requirement but expected by society and by investors. Highly successful, well-established and profitable organisations are having to think about their stakeholders in novel ways, while at the same time the definition of a stakeholder is changing and broadening.

In the past a ‘supernormal’ level of profitability was lionised and considered evidence of a well-managed business. Today investors have to dig further to ensure that it is not due to an excessive rent being extracted from the environment and society at large – one that a company will struggle to sustain under public scrutiny. This is a new world for investors where these high returns can confer as much risk as reward and raise the game for us as asset managers to be effective as stewards of our clients’ capital.

*Source: Fidelity International Sustainable Investing Report 2018

ESG spotlight: China

Historically, investors haven’t associated China and the wider emerging market complex with sustainable investing. With an increasing emphasis on ESG (environmental, social and governance) issues globally, China’s growing focus on sustainable investing will impact the investment landscape in the region.

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