Asian countries should do more to compel companies to be more transparent about their commitment to reducing carbon emissions, to make it easier for institutional investors to reward those taking it seriously, according to a regional asset owners’ association.

A lot of focus is particularly centring on China, the region’s largest economy and the world’s biggest overall polluter.

The Asia Investor Group on Climate Change (AIGCC) maintains that regional institutional investors still face major obstacles in engaging with listed companies on environmental, social and governance (ESG) issues. Its members are concerned that some companies are not sufficiently preparing for the transition to a net-zero carbon economy or playing their part to meet the carbon reduction goals of the Paris climate agreement.

The association represents a set of major asset owners including AustralianSuper, Singapore’s GIC, CDPQ of Canada and Calpers of the US, which combined hold assets of $10 trillion. It will present a new investor engagement guide on Asia electric utilities and climate change at the China Social Investment conference in Beijing on Tuesday (December 1).

Rebecca Mikula-Wright, AIGCC 

The AIGCC paper sets out investor expectations for the companies in the form of key questions for their boards and management teams. The questions proposed are aligned to the four pillars of governance, strategy, risk management and targets as recommended by the Task Force on Climate-related Financial Disclosures (TCFD).

For example, the paper expects companies to show an action plan to reduce greenhouse gas emissions across their value chain, consistent with the Paris Agreement’s goal of limiting global average temperature increase to well below 2°C compared to pre-industrial levels and efforts to pursue 1.5°C. Physical risks, in particular water scarcity, should be taken into account in business planning.

 

According to the report, incidences of greenwashing, or companies claiming to be environmentally conscious without offering evidence, are rife.

“Although an increasing number of companies publish sustainability reports, these do not systematically include quantified, standardised ESG information and do not provide meaningful data for investors,” said the AIGCC report. Its concerns particularly centre around the region’s electricity producers.

“Due to their carbon intensive nature, Asian electric utilities are of particular concern since they contribute around 23% of global carbon emissions and represent more than $200 billion of market capitalisation on Asian stock indices,” Rebecca Mikula-Wright, executive director of AIGCC, told AsianInvestor.

The companies are running out of time to implement genuine change. According to the Science Based Target initiative (SBTI), in the next 10 years electric utilities need to reduce the emissions intensity of electricity generation by 76% under the 1.5°C target – leading to a coal phase-out by 2030 in all OECD countries and by 2040 at latest in non OECD countries.

“The improvement in renewables technology makes this possible, with renewable energy recently becoming competitive against fossil fuels in many places,” said Mikula-Wright.

Many countries have declared their intention to cut their carbon emissions to zero. In September this year, China, Japan and South Korea all committed to net zero emissions by 2050 (or 2060, in China’s case). Elsewhere in the region, the Philippines declared a moratorium on new coal-fired power plants, becoming the first country in Southeast Asia to do so. Thailand also announced plans to reduce coal generation to 5% by 2030.

Yet despite this, there continues to be substantial investment in coal-fired power plants in the region, “increasing stranded asset risks and leading to a missed opportunity to accelerate the transition to sustainable energy systems across Asia,” said Mikula-Wright.

CHINA FOCUS

Stock exchanges in Asia are trying to bring companies into line with global standards on ESG disclosures.

Ever since July, Hong Kong listed companies have been required to issue an ESG report that includes an assessment of the effects of climate change and disclosure of social key performance indicators. This follows on New Zealand’s recent proposed implementation of mandatory climate-related financial disclosure, reflecting the trend of higher disclosure standards globally.

Karine Hirn, East Capital

China particularly lies at the heart of these concerns. The second-largest economy in the world is the focus of a lot of investor attention, and in 2018 seven Chinese regulators announced that listed companies would have to disclose the emissions of several pollutants by this year. Yet investors still have difficulty getting meaningful responses when engaging with Chinese companies, said AIGCC.

“The big thing this year, which has been delayed, is for China to make it mandatory for companies to disclose the environmental impact for A-shares,” Karine Hirn, partner with East Capital in Hong Kong told AsianInvestor.

“But that is a good step, because it gives investors the ability to compare one company’s environmental impact with another. That’s helpful, compared to a system that allows companies to decide what they disclose, which provides a huge opportunity for greenwashing.”

China is the main focus for many investors looking at opportunities in the renewable energy space.

“It’s difficult to find a lot interesting renewable exposure in emerging markets outside of China. Many of them are listed in Hong Kong or on the mainland, so they are accessible to investors though Stock Connect and other channels,” said Hirn.

She added that Asia had been lagging behind Europe, but is catching up now. There are still only 81 Asia Pacific asset owners signed up to the UN’s Principles of Responsible Investment, out of total of 578 asset owners globally; most of those are in Japan and Australia. Two are in China.

However, the number of overall PRI signatories in China (which also includes fund managers) has witnessed a sharp increase, from four in 2016 to 49 as of August 2020. In January 2020, Ping An Insurance of China became the first Chinese asset owner to sign up to the Climate Action 100+. China Asset Management joined this year.