The combination of an active regulator and supportive asset owners has meant that while Taiwan lags countries like Japan and Korea in the implementation of environmental, social and governance (ESG) principles, it is generally more advanced than Southeast Asia countries.
However, the island faces hurdles that are slowing greater adoption. Indeed, one such issue plagues the whole of ESG: there’s no consensus over a central set of metrics. This lack of agreement, when combined with the general appeal of looking ‘green’, has caused some cynical behaviour.
As one institutional sales head of a global company told AsianInvestor, some financial institutions have marketed their financial investment products as being ESG-friendly, but once you dig into the investments the investee companies don’t appear to stand out for environmental or social behaviour at all.
Fund houses offering such products can argue the investee companies have transparent operations and meet their loosely-defined ESG guidelines, but they are not meaningful ESG investments, the sales head added.
Taiwan lacks clearer top-down guidance from the regulator to promote ESG development. That sort of guidance can help minimise greenwashing among funds, said Wen Lih-Chyi, the Taipei-based director at the Center for Green Economy.
Without a definitive ESG benchmark, it’s difficult to ascertain whether the concepts are really embedded in its stock selection or investment process. Taiwan’s regulators must do more to prevent asset managers from simply touting their products as being “green” or “sustainable”.
Part of the regulator’s approach to promoting ESG development was its 2016 introduction of the island’s stewardship code, or set of guidelines about how investors should act responsibly.
ESG advocates argue the stewardship code, while a positive step, is not enough.
Foreign fund houses have been the most assertive in adopting its suggestions, largely because their parent companies are used to living up to the responsibilities of stewardship codes in other markets. But local Taiwanese fund managers are less familiar with the concept; as a result, they tend to follow the code on a more superficial level, said Mo.
Taiwan is also hindered by its unique status; China has long blocked the island being recognised as an independent state by the international community; that means it is not a member of the United Nations or a signatory of its Principles for Responsible Investment. That has practical consequences, as civil servants and senior managers at the island’s financial institutions obtain ESG information later than peers in other markets.
“Promulgation of government policy on ESG is lagging other places. This has a great impact. Our decree is late and we won’t have ESG goals as specific as those in other places,” Wen said.
Yet for all the obstacles, Taiwan boasts some catalysts that can be used to boost ESG development.
For a start, it has a promising environmental industry that can offer investors good investment targets. For example, Taiwan’s recycling rate stood at 52.51% of all the waste it produced in 2017, the third-best rate in the world behind Germany and Austria. There are many good companies in the environmental industry for investors to invest in, said .
There is also a generally good ESG habit among the island’s investors. In 2018 Schroders conducted a global survey of investors and ESG (it defined investors as those aiming to invest
at least the equivalent of €10,000 ($11,349) over the next 12 months).
The survey found that Taiwanese investors were more likely than their global peers to avoid controversial businesses (64% vs 56%), buy from businesses that have a good record of social responsibility (57% vs 52%) and reduce or recycle household waste (77% vs 73%).
This is important because investor behaviour tends to influence investment decisions. Tsay Feng-ching, director general of BLF, told AsianInvestor in early 2018 that the concept of responsible investing is particularly gaining credence with millennials.
“There will be a new type of consumerism in the future and it belongs to the younger generation,” he said. “When they consume, they care a lot about environmental issues and social justice. This is a consumption behaviour that most people have not noticed but I think this consumerism will prevail in the coming one or two years.”
Increasingly, he added, younger people will focus on companies that do a good job in ESG. That could help these companies enjoy better business performance over the long term – and higher share prices.
DEFINING GREEN PRACTICES
While the potential exists, it’s up to Taiwan’s regulators to better define its interpretation of how ESG principles and metrics should look, if fund houses are to adopt the practices and in turn offer genuine ESG-guided products.
If they do so, it could help the market’s green industries enjoy more ready sources of capital, while ensuring companies in other sectors take social responsibilities and sound governance practices seriously.
For all the teething problems, the island’s asset owners appear confident.
“ESG is still beginning to develop in Taiwan but in the long-term, it should follow in the footsteps of the US and European countries,” declared the PSPF official. “This is an inevitable trend in Taiwan.”
This story is adapted from a feature focusing upon the development of ESG in Taiwan, which originally was published in AsianInvestor Spring 2019 magazine.