Sustainability in the Asian Century
Home Credit International
Delivering trusted financial products and services responsibly, to empower people to live the life they want now.
In this newsletter I will be covering sustainability across Asia, summarising the most important developments each month. The goal of this newsletter is to make the Asian sustainability landscape more accessible, and understandable. Every time, I will also make a deep dive into one sustainability topic. For a broader context, I will also refer to key events happening on the global arena.
This first issue provides a helicopter view. I hope to show why environmental and social issues are as relevant in the East as they are in the West, perhaps even more so. Businesses, investors and governments are quickly catching up as they recognize that transformation towards a more sustainable economy presents a unique opportunity.
Who I am
I started living in Asia in 2008 and have stayed in the region for most of the time since. Starting in China as a business development manager, I had the privilege of a first-hand experience of major Chinese businesses, including big tech companies like Tencent, Baidu or Ali, massive state-owned enterprises as well as start-ups and incubators. As a Mandarin speaker, I was able to go beneath the surface and understand the ordinary Chinese perspective.
Over time, I developed interest in corporate social responsibility and ESG. In 2019, I moved to Hong Kong assuming the role of ESG manager at the head office of Home Credit Group, a multinational financial company. Since then, I have been frequently travelling across Asia, visiting my counterparts in other Asian countries, talking to ESG professionals, and witnessing how sustainable practices take roots in the region.
Over the years, I saw ESG grow from an almost unknown concept into a huge wave sweeping the region from Almaty to Manila. Also, from within the company I saw the transformation ESG is bringing to corporations and how sustainable finance is helping to deliver impact.
Sustainability in Asia - Intro
Emerging and developing Asian economies are the fastest growing region globally[1]. Home to two of the world’s most populous countries and serving as the manufacturing hub for the world, Asia will be critical for the success of global climate mitigation and adaptation in the coming decades.
The transition towards green energy also brings new opportunities. Indonesia, the Philippines, China, and Australia host some of the world’s largest deposits of mineral resources critical for the production of EV batteries or solar panels, such as lithium, cobalt or graphite.
At the same time, the impacts of climate change are more tangible here than for example in Europe. Asian cities make up 99 out of 100 cities with the highest level of environmental risk[2]. And in the Workers’ Rights Index, the APAC region ranks second lowest (4.05/5) after MENA. Asian businesses and their downstream suppliers face increasing pressure to comply with strict supply chain rules of global companies[3].
In this context, it becomes clear why sustainability is becoming a huge topic in Asia. Governments or governing bodies, companies, and investors, therefore, pay increasing attention to ESG and incorporate it into their policies and actions.
Asia also puts the sustainability discourse in Europe and the US into a new light. Whereas the Republican anti-ESG wave, labelling ESG as ‘woke capitalism’, is gathering momentum in the US, no such pushback is evident among Asian asset owners. For them, there are substantial material ESG risks, the ignoring of which would lead to poorer investment outcomes[4].
While EU’s ban of ICE (internal combustion engines) cars sales after 2035 faces serious headwinds in Central and Eastern Europe[5], it might be surprising that China[6], South Korea[7] and Japan[8] also have 2035 as their deadline, with India set to follow suit in 2040.
Air pollution in Jakarta. (Photo by IQAir)
Businesses
Asia plays a key role in global supply chains. When the pandemic disrupted their smooth operation, the scale of the impact on the global economy became very clear. Improved management of environmental, social, and governance risks promises a remedy. A big push for it comes from the West.
Very soon, the EU’s Corporate Sustainability Reporting Directive will be raising the bar for how far ESG data should be collected up the stream of a company’s own operation. The US SEC’s proposed climate disclosures will have a similar effect.
As a result, Asian businesses will face an increasing pressure to monitor sustainability issues of their own operations and those of their direct suppliers – and act if they find violations. The CEOs are very well aware of the need to address sustainability issues in their business plans:
·??????60 - 69% of APAC companies in the region have made, or are progressing towards, a net-zero and/or carbon-neutral commitment. That puts them 9-13% ahead of global peers.
·??????77% of Asia Pacific CEOs have had their sustainability approach independently assessed and validated. That is 11% more than global average.
·??????43% of Asia Pacific CEOs have embedded emissions targets into their strategy. The global number is 6% lower.
·??????CEOs in China are the most ambitious. 53% include GHG emission targets in both their strategy, and 46% into a compensation plan.
·??????Australia and India show strong interest in gender representation rates[9].
·??????The average ESG rating of APAC-listed companies recorded the faster growth over the last 3 years: 9 pp for the Hang Seng index, 8 pp for the ASX 200. In contrast, European STOXX 600 average rating, while still comfortably leading, grew by 4pp[10]
Average ESG score in regional indices. Source: Refinitiv
Investors
Unlike the adoption of climate targets in business strategies, ESG investment in Asia is still in its infancy. Some of the main obstacles are the lack of a robust enough framework, a proper taxonomy or investment philosophy processes. In Europe and the US, it took years before the infrastructure was ripe to take off. There is a lack of ESG specialization among Asian asset managers and even more so, among retail investors. But like in the West, for Asian investors sustainable topics are important[11]:
·??????60% of retail investors in the APAC region recognize the importance of sustainable investing.
·??????54% investors would like to use their money to make a positive change in the world.
·??????Mainland China and Singapore are the two markets where investors are most interested in realizing positive change through investing.
·??????However, 36% feel there is a trade-off between investing sustainably and achieving a good return.
·??????49% feel sustainable investments and their providers lack regulatory oversight in relation to the promises they make.[12]
·??????In terms of the assets size of ESG funds, Asia still lags far behind the West. The big bulk of the global $2.5 trillion ESG funds’ assets is located in Europe (82%) and the US (12%). APAC makes up roughly 3.5%, which translates into 86 billion.
·??????In the APAC Region, 70% of the ESG assets are located in Mainland China, followed by Japan (30%), Taiwan (8%) and South Korea (4.7%).[13]
Global Sustainable Funds in Q2, 2022
Governments
While being the fastest-growing part of the global economy, Asia faces number of social and environmental challenges. Climate crisis is already a hard reality here.
Jakarta is the most threatened city in the world by environmental risks – a combination of air pollution, seismic threats and floods. Parts of the Indonesian capital have already sunk below sea level due to heavy groundwater usage.
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In Vietnam, extreme rainfalls and rising sea level resulting in frequent tidal floods take a toll equivalent of 2% of their GDP[14]!
The extreme heatwave in India in March and April this year destroyed 30% of crops in Punjab and the need to air-condition resulted in power shortages. Power allocated to industry had to be reduced and hundreds of trains cancelled to prevent a blackout[15].
Finally, China was hit by the worst drought in six decades, with severe impacts to food and factory production, affecting millions of people.
Asian governments feel the need for a green transition very clearly. However, they often still have some way to go. Asian electricity is the world’s most carbon intense[16]. One kWh of electricity in India comes at roughly 10 times more CO2 emissions (625g) than in France (58g). Keeping the pace of economic growth while achieving a green transition is one of the difficult dilemmas.
Coordinating green policies in an incredibly diverse landscape is quite a challenge. The ASEAN Taxonomy is one of the recent attempts to find accord. The first green bonds are already being issued under the Common Ground Taxonomy developed by China together with the EU. The initial results can be seen but huge challenges are still ahead.
Another hazard is the growing divide between the Asian rich and poor. In Thailand, for instance the bottom 50% of population share just 1.5% of the country′s wealth, whereas the top 10% possess 74%[17].
India, Bangladesh and Pakistan rank “extreme” in the civil unrest risk index[18]. Kazakhstan experienced an unprecedented wave of riots this January, after a sharp increase of gas prices. In July, Sri Lankan fuel and food shortages resulted in massive protests leading to resignation of the prime minister. Most recently, Indonesians have taken to the streets due to mounting fuel prices.
Share of wealth owned by the top 10% of society, Source: World Inequality Database
Green technologies and sustainable finance bring hope for healing many of the environmental and social wounds. A “just transition” is a phrase you will hear often in ASEAN sessions. Inclusive green finance[19] can cushion the vulnerabilities of climate disasters. And green disruption may open the space for competition with well-established economies.
Experience from Home Credit
Finally, I would like to share my direct experience as sustainability manager at Home Credit.
The corner stone of our sustainable strategy is financial inclusion. Already since the very beginning, the founders of Home Credit realised that to build a sustainable business, you need a sustainable business proposition. From the beginning Home Credit understood that financial inclusion must go hand in hand with financial literacy. Thanks to digitalisation, the need for financial and digital literacy has increased even more. ?A whole range of financial services, from credit to investment, has become accessible to a wider spectrum of customers.
This year we have partnered with a world-class financial literacy expert to explore how we can embed financial literacy into different stages of our customer journey.
We believe that now, our company has another important role to play: financing a just green transition.
Vulnerable groups are more exposed to climate-related losses due to a decreased ability to adapt and recover from climate events.
For example, heat waves hit those who cannot afford an air conditioner much harder. Photovoltaic solutions can help cut soaring energy bills. But installing solar panels on your roof requires a substantial initial investment.
Another example is battery-powered electric three-wheelers. They can serve as an extra source of livelihood and increase mobility in underdeveloped areas, without harming the environment.
Inclusive green financing will be one of the key components in climate crisis mitigation and adaptation in Asia.