PERSPECTIVE3-5 min to read

Podcast: Are Asian Companies Engaging with ESG?

In this episode of the Making An Impact podcast series, Claire Herbert, ESG Investment Director, APAC, discusses about active ownership with Xinxin Dong, ESG Specialist, APAC.

20/09/2023

Claire Herbert (CH): Active ownership is becoming a bit of a buzzword, but what actually is it and why is it so common on the investor agenda these days?

Xinxin Dong (XD): Active ownership, sometimes also known as stewardship, means engaging with companies, issuers, and assets to gain insights and encourage sustainable business practices. It short, we are stewards of our client capital. We seek to use our influence as shareholders to help companies and assets to improve their sustainable practices and work towards a long-term favourable business outcome. Active ownership in my opinion is really about generating higher quality returns for shareholders, hence better investment outcomes for our clients.

CH: What does active ownership look like in practice? What are the different approaches?

XD: At Schroders, we have a 3-pronged approach to active ownership which is dialogue, engagement and voting. Dialogues are fact-finding interactions where we get to know the companies, build relationships, and generate insights. Engagements are outcome driven activities where we aim to specifically influence change based on our engagement objectives. Voting is also an important part of our active ownership activities, which we can use to signal our views or drive escalation methods.

CH: How do you approach engagement with Asian companies specifically?

XD: Currently, most engagements in Asia are held 1-1, for either fact finding or outcome-driven purposes. This is for more in-depth discussions with companies on sustainability issues. We also partner with industry associations such as the Asia Investor Group on Climate Change (AIGCC), for collaborative engagements when there is common interest to push for more sustainable practices. In 2022, 80% of our engagements in Asia were outcome-driven activities.

CH: How do you see engagements in APAC differ from other parts of the world? How are companies responding to your engagements?

XD: I would start by saying that there are varying opinions in defining ESG practices in Asia as some believe the region often lags behind international standards in terms of both quality and quantity of disclosure. However, in my view, this may not reflect the significant and multi-faceted developments made by some companies in the region. In fact, APAC is a diverse region with a mix of ESG leaders, improvers and companies just beginning their ESG journey. This often depends on the market, the ownership structure, and the size of the business. In fact, we have seen leading stewardship initiatives and companies implementing best practices emerging quickly over the past years.

In terms of the key differences on engagement in Asia compared to the rest of the world, I’d say the prevalence of family-owned businesses and state-owned enterprises is unique characteristic which makes Asia different. These concentrated ownership structures may pose corporate governance challenges but there are also people arguing that these structures contribute to long-term value creation and interest alignment.

In addition to corporate governance, disclosure and transparency have always been the starting point for our engagements with corporates in the region. Over the years we have actually found companies increasingly acknowledge the need to improve transparency due to pressure from regulators and investors in particular. However, there is also demand for more specific guidance on which area/topics to improve and what is considered regional best practice. In fact, many Asian companies see engagement as an opportunity for both knowledge and relationship building with investors. It is really a two-way discussion instead of us asking questions one-way only.

In addition, I would say we’ve noticed many companies have become more responsive to our engagements compared with a few years ago, Chinese companies in particular. We are also getting access to speak with many more companies dedicated ESG teams more often to discuss sustainability topics in-depth. I do think the overall quality and depth of engagements are improving within the region which is very promising.  

And finally, I think that it is worth mentioning, for outcome-driven engagements, we want our objectives to be measurable, realistic and achievable, hence it’s always important to do the right benchmarking and develop tailored strategies based on regional context.

CH: You mentioned governance and transparency as topics for engaging and Schroders as a group has it’s engagement blueprint which guides the themes and areas for engagement. But specifically, within Asia, are there any specific themes or sectors that you tend to focus on more?

XD: Overall, discussions on climate change targets, emission targets and energy transition have become commonplace, as considerations of national climate ambitions and reginal energy transition ramp up in the region. Policy action has been the main driver for such trends. For example, Chinese companies, particularly State-owned Enterprises (SOEs) and listed companies, have notably become more responsive and ready to discuss their climate targets and policies with us companies to a few years ago. We think this is because many companies are seeking to demonstrate their support for the country’s 30/60 national target.

And beyond climate, topics such as nature and deforestation, supply chain management and engagements on controversies are also gaining momentum among investors due to various regulator and investor push.

And finally, when it comes to specific sectors, I personally find it very interesting to see that industries exposed to higher ESG risks tend to make more progress. Our data has shown that energy and utility companies have better disclosures in climate policies and targets compared with other sectors in the APAC region.

CH: Thanks, Xinxin. So to quickly summarise, active ownership is about working with companies, whether that is through engagement and dialogue or via voting, to gain insights and encourage sustainable practices but ultimately to drive better financial and non-financial outcomes. Investors often prioritise what is most financially material and importantly it should be a two-way conversation with clear objectives and milestones of progress and taking into account local nuances.

The next obvious question will be whether we actually see that relationship between engagement and driving those financial and non-financial outcomes. In the next episode we will look at over 10 years of Schroders’ engagement data to address this question.

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