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Miranda Carr

Miranda Carr
Executive Director, MSCI Research

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Are APAC’s High-ESG-Risk Stocks Cleaning Up Their Act?

  • APAC markets have tended to have low MSCI ESG Ratings compared to global peers. This is changing rapidly, with even some of the worst-performing sectors, such as energy and materials, starting to improve their ESG practices.
  • Some of the high-polluting sectors, such as utilities in China and India and energy in the ASEAN region, have seen marked improvements in their environmental performance over the past three years.
  • The biggest improvement has been seen in social factors, notably among previous ESG laggards in the consumer-discretionary sector in greater China and South Korea and the energy sector in China, due to better human-capital management.

Until recently, the Asia-Pacific region’s ESG performance has suffered from a combination of low ESG adoption and awareness and limited ESG regulation and reporting. As a result, some of the sectors in the region with the highest concentration of ESG Key Issues — notably consumer staples, energy and materials — have lagged significantly behind the global average on both their environmental and social ESG scorecards.

 

Average ESG Score for MSCI APAC Index & MSCI ACWI Index

Proportion of Laggards, Average and Leaders ESG Scores for MSCI APAC Index & MSCI ACWI Index

Data from Dec. 1, 2018, to May 25, 2021. Source: MSCI ESG Research LLC

Laggards (ESG Ratings CCC-B), Average (BB-A) and Leaders (AA-AAA). Source: MSCI ESG Research LLC

 

These sectors require stronger corporate management and reporting to offset the greater number of ESG risks. For example, companies in the consumer-staples and the materials sectors need to address an average of eight key environmental and social issues, ranging from their land use and carbon emissions to product safety, whereas a business-services company may face only three, based on MSCI’s ESG Industry Materiality Map.

Growing company awareness and stricter reporting requirements for these ESG issues in key markets in APAC (such as the revised ESG-reporting regulations introduced last year in Hong Kong), combined with tighter industry regulation in key areas such as pollution and waste and privacy rights, could contribute to improved ESG performance for many previously high-risk/low-scoring companies in the region.1

To see how these trends played out over the last three years, we looked at the ESG performance of MSCI APAC Index constituents by Global Industry Classification Standards (GICS®) sector.2 Over 80% of sectors in each APAC market have seen an improvement in their overall ESG scores over this period. Moreover, the majority of improved sectors were previous ESG underperformers, with an average industry-adjusted ESG score below the global average, as shown in the exhibit below.

 

Improvement in Sector ESG Scores in APAC Markets, Under- vs. Overperformers

 

Data from Dec. 1, 2018, to May 25, 2021. Underperformers are sectors by market with ESG scores below the global average, and overperformers are sectors by market with ESG scores above the global average. Source: MSCI ESG Research LLC

 

Focusing on the ESG sectors that had the highest risk in the APAC region for environmental and social Key Issues — consumer staples, energy, materials and consumer discretionary (primarily autos) — shows the APAC region still lagging significantly behind the global average ESG scores in most countries, however. The greatest concerns remain in the South Korean, Indian and Chinese markets in terms of overall risk.

 

Low-ESG-Scoring Sectors in APAC Region vs. APAC and Global Averages

Data from Jan. 1, 2021, through May 25, 2021. All sector ESG scores, including global and APAC averages, are calculated using the total investable market. Source: MSCI ESG Research LLC

But some of these laggards have shown notable signs of improvement. As can be seen in the exhibit below, most companies in these four sectors have managed to enhance their social scores over the last three years; and most, but not all, have improved their environmental performance.

 

Low-ESG-Scoring Sectors in APAC, Change in Social and Environmental Scores

Data from Dec. 1, 2018, to May 25, 2021. Markets: ASEAN region (ASEAN); Australia/New Zealand (AUS); mainland China (CH); Hong Kong/China (HK); India (IND); Japan (JP); South Korea (KOR); and Taiwan (TW). Source: MSCI ESG Research LLC

 

On the environmental side, the industries in China and India that many ESG investors love to hate — cement and metals — have improved from a low base. Although still among the lowest-ranked of all companies in APAC, the regional giants, including Aluminum Corp. of China Ltd. (Chalco), China National Building Material Co. Ltd. (CNBM) and Anhui Conch Cement Co. Ltd., have all notched higher environmental scores over the last three years.

On the social side, the relatively low-scoring consumer-discretionary sector has shown the most improvement in South Korea, China, Australia/New Zealand and Taiwan. This is chiefly due to better human-capital management, implying that companies are either treating their workforce better or reporting more about it.

The picture is not all rosy, however. The environmental performance for the consumer-staples sector across most countries in the region has declined. There are two big contributors to this trend: a drop in performance for natural capital in India and Australia owing to greater water stress in these markets (primarily affecting the food producers and beverage companies); and the addition of plastic waste as a Key Issue for the consumer-staples sector, which has particularly hit companies in South Korea and Japan.

APAC companies have come a long way in three years. Many companies in some of the key developing markets of Asia had only just started reporting on their ESG practices in 2018. This trend offers the prospect of continued improvement, particularly on climate change. If that happens, over the long term, many of APAC’s previous ESG laggards could become the new ESG leaders.

 

1Zhou, Yacheng, Zhou, Xuan, Wang, Dan, and Cheng, Miao. 2020. “Environmental Law 2020: China.” Chambers & Partners, Nov. 13, 2020.

2GICS is the global industry classification standard jointly developed by MSCI and Standard & Poor’s.

 

 

Further Reading

ESG Now Podcast: APAC is Better at ESG and EVs Aren’t Enough

ESG Investing in Emerging Markets

Integrating ESG in emerging markets and Asia

 

Regulation