Asian companies, particularly those in Southeast Asia, are at risk of falling off multi-national corporations’ supply chains if their Environmental, Social and Governance (ESG), strategies are not addressed.
The view comes following the release of a HSBC-commissioned report1, in partnership with East & Partners, which looks at 1,731 companies and institutional investors’ attitudes and actions around ESG. The research included responses from more than 300 companies and investors in Asia – specifically China, Hong Kong, and Singapore.
According to the HSBC report, 24% of Asian respondents have an ESG strategy compared to 48% of corporates globally and 87% of European and UK companies
The report finds that, globally, tax incentives and financial returns are the two biggest drivers for corporates undertaking ESG-related activity.
However, Asian corporates’ motivations depart from their global peers. Whilst tax incentives are the biggest driver, Asian corporates feel that stakeholder pressure and supply chain initiatives also contribute in driving ESG decision making. In fact, supply chains are the second most important driver for larger Asian companies.
The disconnect between European and Asian companies’ adoption of ESG strategies, and the sensitivity of Asian corporates to stakeholder pressure and supply chain initiatives, raises the question of what this means for Southeast Asia’s supply chains.
European and British companies have deep and historic supply chain connections in ASEAN. For example, many European corporates are invested in electronics, textile and auto industries in the region. And the connectivity is growing:
The pressure for Asian corporates involved in supply chains within Southeast Asia is further compounded by separate research by the Carbon Disclosure Project which indicates 80-90% or more of a business’s environmental impact is located in its supply chain8.
HSBC’s Global Head of Sustainable Finance, Daniel Klier said: “With Europe’s clear leadership in ESG adoption, it stands to reason that large corporations will want to see a similar shift in their suppliers’ ESG stance. ASEAN is increasingly becoming the supply chain ‘factory’ for several sector strongholds for Germany, France, UK and China including electronics, textiles and automotive. These companies are making very clear and public proclamations on their ESG strategies as well as their expectations on their suppliers. ASEAN suppliers of European clients who are not alive to this change risk being left behind.”
HSBC’s research finds that when Asian corporates tap green finance, it’s overwhelmingly for specific projects rather than general purpose. According to the HSBC report, 78% of Asian corporates who have accessed green finance use it for business projects that are green by definition – more than any other region. This is good news because Asian corporates will more likely be eligible for financing under the Asia Pacific Loan Market Association Green Loan and Green Bond Principles9. Green funding requires companies to state what the use of proceeds are for and, that said proceeds are tracked and monitored.
HSBC’s Green Finance lead in Asia, Jonathan Drew, said: “The research suggests that fewer Asian companies have an ESG strategy compared to their global peers; however, when they do seek ESG-related finance, it seems to be for specific projects. This creates an opportunity for both Asian corporates to reinforce their position by utilising green labelled financing to communicate their focus on sustainability issues, and for others to gain advantage over their peers whilst ‘sustainability leadership’ remains relatively scarce. This is particularly relevant as we’re increasingly seeing regulators, investors and customers in supply chains want more understanding and transparency of both if and how corporates are addressing ESG issues generally and specifically how their ‘green’ capital is actually being applied and whether it aligns with promises originally made.”
“ESG has become a competitive area, with urgency required given the significant rewards and incentives for Asian corporates to move now to address the issues and communicate this to stakeholders. Green finance is a great tool to achieve this with better disclosures of approach and through reporting measures to distinguish between investments that are financially sustainable and those that are less so. This brings a whole new level of attention to not only the type of business you’re engaged in but how you go about that business. If you’re a corporate issuing a green bond or green loan, your stakeholders and investors know they are supporting a business that is addressing environmental challenges. That’s a great label to wear and it impacts on the cost of capital.”
1 Sustainable Financing and ESG Reporting, East and Partners, September 2008
2 EU-Asean Business Sentiment Survey 2018
3 EU-Asean Business Sentiment Survey 2018
4 EU-Asean Business Sentiment Survey 2018
5 According to the International Labour Office (ILO)
6 ASEAN in Transformation. ‘Electrical and Electronics: On and Off the Grid’, International Labour Organisation, 2016
7 “Thai the knot,” GoAuto News Market Insight Report, August 5, 2009, No. 494, p.18
8 Carbon Disclosure Project
9 See Editor’s notes for details