From his perch as chief administrative officer at CLP Holdings Ltd, one of Asia’s biggest electricity generators, David Simmonds has seen a sea change in how investors engage with the region’s companies on climate risk.
A decade ago, only those with an environmental agenda asked about it. It then evolved to pension funds responding to concerns from their members, moved to sovereign wealth funds and finally – around two years ago – became very much a mainstream issue.
“Climate change went from a topic that might have been one item on an agenda somewhere in a meeting,” Simmonds said. Now, it’s “probably the first question asked by investors on every presentation.”
After years of pressure from mostly European investors, Asian companies are pulling ahead of their North American counterparts when it comes to climate risk reporting. And there are signs the region is approaching an inflection point as major economies including China, Japan and South Korea commit to achieving net-zero emissions in the coming decades.
There’s been a huge increase in awareness and action from investors in Asia on climate-risk reporting over the last five years or so, according to Rebecca Mikula-Wright, executive director of the Asia Investor Group on Climate Change, which represents more than 40 fund managers with a combined $9tn of assets under management.
Japan’s Government Pension Investment Fund – the world’s largest – has for years been a strong advocate for ESG investing, an approach that takes into account environmental, social and governance issues. That had a trickle-down effect, she said.
A surge in money flowing into ESG-themed exchange-traded funds has also given companies greater incentive to boost their credentials. Such ETFs listed in the US and Europe received over $50bn so far in 2020, more than double from last year, according to Bloomberg Intelligence. Asia is catching up, with a record-high $8.7bn of net inflows into sustainable funds in the third quarter, Morningstar data showed.
In Asia, a key turning point was 2017, when the Taskforce on Climate-Related Financial Disclosures finalised its recommendations for reporting climate risk. The proposal offered companies a standardised framework that helped boost disclosures.
Asian companies were ahead of their North American counterparts on nine of the 11 climate-reporting metrics covered in the TCFD’s last status report released in October, which surveyed 1,700 large global companies, though they lagged their European counterparts in all the measures. Asia did well in part because the region has embraced TCFD as a standard. Michael R Bloomberg, the founder and majority shareholder of Bloomberg LP, the parent company of Bloomberg News, is the chair of TCFD.
Covid-19 has also made the public, politicians and companies more aware of the potential damage such global crises can cause, prompting more focus on climate risks, according to Yoo-kyung Park, head of responsible investment and governance at APG Investments Asia Ltd, a unit of a Dutch pension asset manager.
Asia’s early movers on climate-risk reporting – including Samsung Electronics Co, Taiwan Semiconductor Manufacturing Co and CLP – tend to be globally focused companies, Park said. The laggards are generally more domestic-oriented firms that don’t have a lot of international investors. “They don’t compete on climate-change issues and local financial institutions aren’t barking at them,” she said. “Those are the tough ones for us to tackle.”
Many of Asia’s biggest companies are state linked, meaning they’re less susceptible to investor pressure and may require a push from government before changing their climate strategy. That’s starting to happen, with stock exchanges from Hong Kong to Thailand mandating ESG disclosures and pushing for stricter reporting rules.
The rapid and more government-led evolution of climate-risk reporting in Asia, compared with Europe where it’s grown over a longer period of time, raises the risk that some companies will just pay it lip service to appease the authorities rather than actually re-orienting their strategy. But that’s not an option for industries which are inherently more vulnerable to climate change.
Singapore-based Olam International Ltd, one of the Asia’s biggest agricultural companies, was an early mover on climate-risk reporting. It’s taken steps to reduce carbon emissions from rice farming in its supply chain and developed a decision-making tool that seeks to quantify its environmental risks in its financial statements.
“If you are able to put a dollar number on that and people can understand and see it improving year on year, then it brings in much more comfort and clarity,” said Rishi Kalra, managing director and group chief financial officer at Olam Food Ingredients. “I think that really has been a big differentiator for us.”
Australia’s wildfires, record floods in China and devastating typhoons in the Philippines have been recent reminders of the climate risks that Asia faces. In the longer term, sea-level rise threatens many low-lying areas while extreme heat is a growing threat in South Asia.
That makes it much more difficult for companies to credibly maintain that climate change is a problem for the next generation, CLP’s Simmonds said. His company, which has power generation assets in China, India, Southeast Asia and Australia, began work to shrink its carbon footprint in 2007. By last year, it had almost doubled the share of non-carbon generation capacity in its portfolio.
With the frequency and intensity of typhoons in the South China Sea likely to increase, CLP also started a project to strengthen its transmission towers in Hong Kong. It’s now trying to get a better handle on how changing weather patterns will affect its wind assets and where it’s most vulnerable to storm surges, flooding and rising sea levels.
Other Asian companies may be coming to the game later, but past experience has shown that they can move quickly. “European and North American investors started this journey on sustainable investment and responsible investment a lot earlier,” said Mikula-Wright. However, “Asia’s always had a history of catching up very quickly and leapfrogging because they’re very pragmatic.”
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