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ESG Investing
No US-style ESG backlash expected in Asia
Avoiding politicization top challenge for investors, regulators in highly diversified region
Bayani S. Cruz 27 Feb 2023

Unlike in the US where the backlash against environmental, social and governance (ESG) investing has culminated in congressional legislators battling the regulators last week, there is little to no backlash against ESG expected in Asia, at least in the short to medium term.

The reason is the foundation for ESG investing Asia is a bit different from that in the US. In simple terms, the difference is that in the US, the foundation for ESG investing has become a partisan and political issue between its proponents and critics, while, in Asia, it is still evolving and not yet in a stage where it can be politicized and subjected to partisanship.

The challenge for Asian investors and regulators is how to prevent ESG investing in the region devolving to the stage where it can become politicized and subject to partisanship. In fact, this is a real risk that should be avoided at all costs.

Experts agree that within Asia there’s still a debate around the contribution that ESG funds can make to an investment portfolio, both in terms of real-world impacts and performance. Their hope is that this debate will eventually be settled in a manner that can set a relatively good foundation for a pragmatic approach to ESG and define what it can contribute to investment as well as the reduction in the level of global carbon emissions.

In simple terms, Asian investors and regulators have to agree on the basic definitions of principles, parameters and standards for implementation of ESG, particularly ESG disclosure rules, across all markets. This may be a tall order considering how many markets there are in the region, as well as how different each one is in terms of regulation, capital market development, cultural background, investment priorities, etc.

On the bright side, Asia is catching up very quickly with the European Union and the US in terms of ESG disclosures.

Apart from regulatory requirements, Asian investors attitudes towards ESG are also changing with many of them starting to ask sophisticated questions, especially institutional investors who are beginning to take a very granular view of the ESG policies of particular companies, including their climate scenario analysis, investor engagement, etc.

However, just to emphasize the magnitude of the challenge, in the US, there is only one regulator, the Securities and Exchange Commission (US SEC) and one set of rules. And yet it hasn’t prevented the extent of politicization and partisanship that has evolved there and is plaguing ESG investing.

On February 22, a group of Republican congressional leaders announced the publication of a letter to US SEC chairman Gary Gensler questioning the commission’s proposed climate-related disclosure rule, arguing that it exceeds the SEC’s authority and accusing the commission under Gensler of pursuing a “progressive social agenda”.

It may be tempting to brush this off as an act of partisanship by one political party, but the anti-ESG investing lobby in the US is a powerful, coordinated and highly motivated movement.

Their efforts so far have resulted in the State of Florida announcing on December 2022 that it was taking US$2 billion out of the management of BlackRock, the world’s largest asset manager, which represents the largest ESG-related divestment so far.

And, in December 2022, the world’s second-largest asset manager, US-based Vanguard, which has refused to rule out investments in fossil fuels, pulled out of the Net Zero Managers initiative, an industry-wide alliance committed to reducing carbon emissions, after it found itself caught between the pro- and anti-climate change sides.

Texas, the US’ largest oil-producing state, has also passed a law that bans its municipal pension funds from doing business with a list of financial firms and banks that have ESG policies against fossil fuel.

If Asia is to avoid such politicization and partisanship, apart from agreeing on common definitions, one possible solution is to have an arbitration body or bodies at the national or regional levels that are highly respected and supported by regulators and investors alike.

These arbitration bodies can be the fora for resolving disputes and disagreements between parties over definitions, principles, parameters and standards for implementation, etc.

Of course, there is no guarantee that even with such arbitration mechanisms ESG investing in Asia will not end up politicized anyway. But at least there is some hope that it will not devolve to the same level that it has in the US.

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