Derek Ip Yuan Jiang

Sustainability matters for all investors nowadays, whether financial returns or sustainable outcomes are the driving motivations.

Many Asian investors are moving beyond ‘why’ towards the question of ‘how’ to best integrate environmental, social and governance (ESG) factors into their investment decision making. How can sustainable investing (SI) add value to our clients and to the companies we work with? An active approach and purposeful engagement can play a crucial role here.

From exclusions to integration

SI has long since shifted away from being solely about exclusions – i.e., fossil fuel companies and the like with poor ESG metrics – or to just invest in companies with better scores. With a focus on participation and transition, helping lagging companies change course and find the right business strategy to get on a more sustainable path is now the goal of many investors.

The potential for SI’s role in improving risk management is now better understood as well. Yet, while managing downside risks such as reputation is important, the challenges in climate change call for immediate solutions, which can lead to investment opportunities. We therefore methodically integrate sustainability themes into our research and leverage our engagement activities to identify insights to generate investment outcomes for our clients.

As sustainable investing continues to broaden and evolve, we are consciously taking a more nuanced and purpose-driven approach to delivering value. And engagement underpins our efforts in this area.

What is ESG engagement?

Engagement meetings, usually with the board of directors or executive management team of a company, center on ESG topics (see chart below). Discussions on energy transition, climate change and emissions targets are commonplace, while we also dedicate considerable time on corporate governance and annual general meeting (AGM) voting. This extends to, for example, how a company structures its board of directors and remuneration as well as how it discloses governance issues to shareholders. Oftentimes the conversations aren’t easy.

There are also occasions when we have to push for short-term ESG improvements, especially when engaging with companies caught in controversies. Operational failures that negatively affect people and communities, breaches of international principles and other predicaments can damage a company’s business and reputation, which require swift and comprehensive remediation.

Engagement meetings by theme

Engagement meetings are centered around these ESG topics: environmental, social and governance as well as strategy, financial performance and capital allocation.
Source: UBS Asset Management 2023, for illustrative purposes only.

This pie chart shows a breakdown of the different ESG topics discussed in engagement meetings.

By establishing a direct link between investment and engagement, we can better contribute to the growth of the company and drive toward a better outcome for our clients. We take ESG opportunities identified by our investment teams and work with the company on a corresponding strategy or solution.

Mindful of local nuances

Engaging Asia Pacific companies on ESG topics can be different from engaging companies in Europe or other parts of the world because the environment they operate in is different. Capital markets, regulatory environments and economic structures differ significantly, and more often than not, cultural differences call for an approach and etiquette that align with what is locally acceptable.

It is fair to say Asia started on its ESG journey later than Europe. However, it is making up for lost time (see chart below). Many companies are incorporating ESG goals as an important part of corporate agenda and governance. They are learning and adapting international practices on climate change and carbon transition into what makes sense for their local markets. We are encouraged by the commitment and ambition of companies in the region.

Percentage of companies engaged by region

Asia started on its ESG journey later than Europe, but it is catching up with Europe and Americas fast.
Source: UBS Asset Management 2023, for illustrative purposes only.

This pie chart shows a breakdown of ESG engaged companies by regions.

Filing shareholder proposals is an engagement tactic that is becoming more common, but in Asia it can sometimes lead to unintended contentiousness with a company’s management given the cultural differences. And engaging with state-owned companies may require policymakers or regulators to be part of the change, which takes time.

By and large, we find Asian companies to be more at ease in one-on-one meetings, and discussions behind closed doors tend to be more productive than large group settings like industry events involving media coverage. Decision makers in Asian companies are harder to gain access to compared to European companies, so helping internal experts to gain a full understanding of our expectations is crucial in order for them to make the ESG case on our behalf.

Here is an example to illustrate how ESG engagement works in practice in Asia.

Chinese food company makes remarkable ESG progress

Food safety and nutritional standards are top of mind concerns in China. Our engagement with this food products company began three years ago, when the Access to Nutrition Initiative (ATNI) first included Chinese companies in its index. ATNI is a global alliance that calls on the world’s largest food and beverage manufacturers to address nutrition challenges and deliver healthy, affordable food. Our food products company scored poorly then (mostly due to a lack of available information to ATNI), but it led to a collaborative engagement opportunity.

Working closely with 30 investors, we co-led the engagement with the company as part of our membership to the ATNI. The initial goals included a better understanding of why the ATNI is important to investors as well as a push for adoption of best practices in the areas of governance, strategy, lobbying, transparency and operational safety.

From the start, the company was open to making changes. Even before the engagement, it was exploring a nutrition evaluation system to promote development of healthy food, and strengthening controls on product nutrients based on its research. Our engagement was the extra push that the company needed to move forward.

To focus on improving the nutritional profile of its food products, we encouraged the company to set targets on various goals in reducing oil, salt and sugar content as well as fortifying foods to provide a public health benefit.

The company’s willingness to work with us on key ESG initiatives beyond ATNI has also allowed it to make significant progress on climate change, clean water and health topics during our engagement in the past three years. In reducing greenhouse gas emissions, we encouraged the company to take a step further and improve the carbon footprint of its suppliers. The company agreed and is working to establish an emission reduction ecosystem with suppliers – a systematic approach to measurement and reduction with set targets.

Such remarkable progress has not gone unnoticed. An ESG rating upgrade, inclusion in a sustainability index and an environmental award later, the company’s sustainability journey is well on its way.

Engage and deliver

We see ESG engagement as an integral part of us driving material change and real-world outcomes. With a strong commitment to SI alongside our global scale and asset class breath, we can help companies and our clients in Asia achieve their sustainability preferences and objectives. An active approach and determination to engage will get us there.

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