The report highlights the growing concern in Asia over rights-related risks posed by industries. The report discusses the state of environmental, social and governance (ESG) investments in Asia, examining investor responses, regulatory challenges, and offers recommendations based on the UN Guiding Principles on Business and Human Rights.

Introduction

ESG investment, which integrates environmental, social, and governance issues into investment decisions, aims to improve long-term returns while fostering responsible business practices. While ESG investment has been driven primarily by European and US markets, its effectiveness is being tested in Asia’s dynamic markets, where economic growth has led to significant environmental and social challenges.

ESG funds in Asia

ESG-focused funds in Asia have seen growth but remain modest in scale, with Asia-based sustainable funds accounting for only 3% of the global total ($87 billion). China holds 45% of these funds and Japan 29%. Despite rapid growth, the market faced challenges in 2022 due to greenwashing concerns and regulatory scrutiny. Most funds invest in large public companies where they hold small stakes, limiting their influence. ESG ratings often fail to reflect true sustainability, focusing more on financial risks than actual impacts.

Active ownership

Institutional investors and asset managers in Asia are increasingly engaging in active ownership, using their influence to push for sustainability. This includes voting at shareholder meetings and direct engagement with companies. Despite the challenges posed by controlling shareholders and complex voting rules in Asia, stewardship codes have encouraged more active ownership, promoting long-term value through engagement on ESG issues.

GSS+ bonds and sustainable finance in Asia

Green, social, and sustainability-linked bonds, collectively known as GSS+ bonds, have grown rapidly in Asia, with issuance rising from $1.6 billion in 2014 to $143 billion in 2021. China was the world’s top issuer in 2022 with $85 billion. These bonds finance projects with environmental and social benefits. However, the market faces challenges in ensuring the credibility and impact of these instruments. Consistent and robust standards, along with improved verification and monitoring, are needed to enhance investor confidence and the effectiveness of GSS+ bonds in funding sustainable projects.

The infrastructure of ESG

The development of regulations, reporting standards, and taxonomies is crucial for supporting ESG investment in Asia. Countries are moving towards mandatory reporting frameworks to replace voluntary ones, with efforts to combat greenwashing and define sustainable financing. Initiatives like the ASEAN Taxonomy and the China-EU Common Ground Taxonomy aim to facilitate international capital flows by providing clear guidelines for ESG investments.

Asia’s savings as a resource for sustainable investment

Asia’s high savings rates provide a significant pool of capital for sustainable investment. Institutional investors, including pension funds and sovereign wealth funds, are increasingly embracing ESG strategies. However, convincing wealthy investors of the financial merits of sustainability remains a challenge. The younger generation shows more interest in ESG investments, indicating a potential shift in future capital allocation towards sustainable finance.

Recommendations

The report offers several recommendations to enhance ESG investment in Asia:

• Align investments with human rights: Investors should integrate human rights considerations into their investment processes and engage with companies on these issues.
• Enhance regulatory frameworks: Governments should strengthen regulations to support ESG investment, ensuring transparency and accountability.
• Promote active ownership: Encourage institutional investors to adopt stewardship codes and engage actively with companies on ESG issues.
• Develop credible standards for GSS+ bonds: Establish consistent and robust standards for GSS+ bonds to improve their credibility and impact.
• Leverage Asia’s savings: Mobilise high savings rates in the region for sustainable investment by promoting the financial benefits of ESG strategies.

By implementing these recommendations, Asia can enhance its ESG investment landscape, addressing environmental and social challenges while fostering sustainable economic growth .