ESG Integration – Far East Growth

Environmental, Social and Governance (ESG) analysis is fully integrated into our investment process and implemented via the same templates which we use for each sector. The weight we place on each element of ESG varies between sectors and countries. However, assessing management quality has always been paramount in Asia, where the rapid growth of new industries has led some companies to be less independent from family interests and closer to governments than one would ideally wish. This can often lead to divergence from shareholder interests and needs careful monitoring. Understanding the governance of our investee companies is now and has always been a basic component of Asian risk assessment. We conduct regular meetings with management to assess both financial and non-financial factors and engage with companies via a variety of means: face to face; via email and letters and through voting on the shares we hold.

When considering non-financial factors, we look for companies which are seeking to improve their performance year on year in areas of social and environmental management, as well as implementing a steady improvement to governance. The basic need to consider ESG factors in Asia is not yet fully established, although, as described above, searching questions on governance have always been at the heart of frank discussions with investee companies. Over time, we expect the integration of ESG into portfolio analysis to become mainstream in Asia, however, in some countries, a limited understanding of ESG and lack of appropriate corporate culture has meant that evolution, rather than revolution is key to engagement to improve ESG in Asian investee entities. The charts below shows the growing influence of ESG on investing in Asia as a whole, but even in Singapore, it is only a nascent factor in published analysis.

Impact of ESG Issues on share prices in the Asian region

Source: CFA Institute ESG Integration in APAC 2019

Impact of ESG Issues on investment analysis in Singapore

Source: CFA Institute ESG Integration in APAC 2019

ESG data in Asia at the start of 2020 is woefully lacking and that provided by the principle ratings lacks consistency and rarely covers smaller entities in less developed countries. Historic data is rare and even more rarely comparable. Consequently, we have developed a series of templates which we use as an adjunct to our long-established sector templates. Each template attempts to focus on only the factors which are considered material to that sector, in both its financial and non-financial segments, but allows us to compare entities across countries. These allow us to supplement quantitative data provided by the major providers with qualitative information gleaned from company meetings and published documents to better understand the extent to which investee companies understand ESG and are working to improve it, giving us our own comparators where data from the principle providers are lacking.