A long term ESG investing view is needed to put ASEAN back on the growth track

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Schoolchildren make their way to school as haze from forest fires blankets Palembang on October 14, 2019. - In the pursuit for economic growth, ASEAN needs to keep a close eye on emissions and pollution for two main reasons. Firstly, diminished lung capacity has been linked to increased susceptibility to respiratory viruses, while the increase in particulate matter in the air can help spread viruses. This is a real concern given that the manufacturing powerhouses of ASEAN – Indonesia, Thailand and Vietnam – have the worst air quality within the region, as of 2019.
APRIL 27, 2020 - 1:49 PM

The COVID-19 pandemic has swept across the world fast and furiously like a tsunami. Many countries are drowning in cases and most are in some form of lockdown, many are struggling to catch a breath, while a handful are managing to stay afloat. Whichever situation a country finds itself in, there are complex factors at play in anticipating the impact left on economies, jobs and society after the pandemic. Against this backdrop, environmental, social and governance (“ESG”) issues, while arguably more important than ever, can often seem at odds with each other.

On one hand, COVID-19 seems to be allowing the natural environment a brief respite, estimating a 3 billion tonne decrease in carbon dioxide, on the other, the pandemic is a social catastrophe that has shone light on the explicit lack of resource allocation from the public and private sectors towards the healthcare
industry – a fundamental infrastructure for any country. As cash-strapped businesses on the brink of bankruptcy seek financing and global equity markets have seen a massive sell-off, investors have the opportunity to cherry-pick. However, learning from past crises, identifying a robust governance structures within a company must still be a priority if we hope to thrive. For example, a Harvard Business Review study following the Global Financial Crisis, which examined the strategies of companies that thrived after the recession, found that these companies handled their “S” and “G” issues particularly well; most had decentralised decision-making structures, and managed their workforce and payroll without massive layoffs.

As the pandemic continues to expose well-hidden and forgotten flaws of countries, societies and businesses, we cannot afford to be in denial about material issues across these levels – especially since they tend to be long-term issues with lasting consequences, and need to be appropriately addressed. Bailouts by governments, which seek to bridge short-term cash flow crunch, without requiring recipient companies to mitigate critical issues only serve to substitute today’s crisis for the next ‘tsunami’.

Implications for ASEAN economies

The COVID-19 pandemic has undoubtedly added complexity in solving the issues pertinent to ASEAN. The region has been driving economic growth through industrial manufacturing and agriculture activities in an attempt to bring 14.7% of its population out of poverty. Extreme poverty was expected to be eradicated by 2030, however, with COVID-19 impeding the expansion of economies and the region already experiencing a reverse trend in growth of real GDP per capita, it is
likely that this target will be missed with more people pushed back into the poverty cycle.

In Indonesia alone, 3.7 million people are estimated to fall into poverty following this pandemic. ASEAN typically has a heavy reliance on fossil fuels, emitting 1.4 billion tonnes of carbon dioxide in 2018, more than the Central and South America. This trend was projected to increase, along with carbion dioxide, nitrogen oxides and sulphur oxides pollution which are set to jump by 20 per cent or more by 2030. The estimates do not yet take into account the recent crash in oil prices which will incentivise new projects to use oil as the dominant fuel source for road, aviation and shipping sectors – the leading polluters in ASEAN.

In the pursuit for economic growth, ASEAN needs to keep a close eye on emissions and pollution for two main reasons. Firstly, diminished lung capacity has been linked to increased susceptibility to respiratory viruses, while the increase in particulate matter in the air can help spread viruses. This is a real concern given that the manufacturing powerhouses of ASEAN – Indonesia, Thailand and Vietnam – have the worst air quality within the region, as of 2019.

A WHO study in 2018 found 10 epidemic threats since 2000, of which half are linked to the respiratory system, making another outbreak a real possibility in the near future.

Secondly, the region faces pre-existing environmental challenges that need to be dealt with as a priority given that a number of its megacities are among the most vulnerable to rising sea levels and other climate change impacts. The World Bank predicts that by 2050 four out of five people impacted by rising sea-levels will live in East or South East Asia, and if left unaddressed, climate change could reduce Southeast Asia’s GDP by 11 per cent by 2100, according to ADB forecasts. 

An ESG-integrated investment framework for the long-run 

ASEAN’s ability to respond to the next pandemic and climate change mitigation while eradicating poverty will be determined by the investment decisions made today. Using an ESG-integrated investment framework to assess potential investments constitutes a holistic approach to consider environmental and social externalities, alongside the traditional financial analysis. It adopts a multi-dimensional consideration of factors in both near and long term, enabling investors to recognise the impact of exploring alternative investments which are just as profitable, and engaging with companies to take on a more responsible business approach.

This starts with identifying material issues through multi-stakeholder engagements, followed by developing and testing solutions, then tracking and monitoring the efficacy of the solutions. Entities must also be held accountable by reporting periodically on the results. This is easier said than done as it requires a momentous change in mindset in people, businesses, governments and investors for pertinent long term issues to be addressed on an ongoing basis, instead of taking the view that they are important but not urgent, and therefore do not require prompt action. When priorities change, resources, such as fund flows, will also move in that direction.

Implementing an ESG-integrated investment framework aids this transition as it applies an additional lens that examines sectors and companies over a broader range of crucial issues which may not be typically considered. This is key to helping investors mitigate short term volatility and build more stable income streams from high quality issuers. Such an exercise also enables investors to untangle and understand interlinked ESG issues by weighing the relevancy, materiality and consequences of these issues, and ultimately assess how well a company is managing them.

State-backed investment fund Temasek Holdings which has embraced sustainable investment in recent years, setting up a Sustainability and Stewardship Group to drive the firm’s ESG mandate. Temasek ensures ESG considerations are factored into investment analysis and engages its portfolio businesses, encouraging them to implement responsible practices. To spur investment stewardship within Singapore, Temasek also founded the Singapore Asia Centre which published the
Singapore Stewardship Principles (“SSP”) in 2016, with more than 50 signatories to date.

At Maitri, we echo the value of having an integrated ESG-integrated investment framework in place, having recently published our Responsible Investment Approach guided by UNPRI and SSP principles, to both of which we are signatories. Having a robust, proprietary framework ensures that we consider material ESG issues for each investment in both the short and long term, in order to gain a holistic view. The decisions we make today will define ASEAN’s ability to realise its growth potential in the decades to come. As stewards of capital and investors, there is still much more to do.

 

The writer is ESG Practice Lead, Maitri Asset Management. Maitri is a Singapore-based asset manager focused on active responsible investment management. Maitri is a signatory of the United Nations-supported Principles of Responsible Investment and the Singapore Stewardship Principles.