The robust growth of Asian economies, led by China and
India, is beyond doubt. Indeed, Asia is expected to remain the key driver of
the world economy, with an expected gross domestic product (GDP) growth of 5.5%
for 20181. Yet, whilst seeking economic growth, many Asian
companies are more known for making money at the expense of ignoring climate
and social issues such as carbon emission and water pollution – let alone the
poor work conditions and weak corporate governance.
However, as time goes on, and with Asian companies facing
increasing regulations and a growing number of institutional investors as signatories to the UN Principles for
Responsible Investments (PRI), more companies appear to be considering ESG issues
in their operations.
the past 10 years, the MSCI AC Asia ex Japan ESG Leaders index2
generated an annualized return of 5.55%, outperforming its broader market by
2.75% points, whilst the ESG leaders in developed markets paled in comparison
(Figure 1). Taking volatility into consideration, Asian ESG leaders also outperformed
their counterparts in the developed world – registering a much higher Sharpe
ratio (Figure 2).
The favorable discrepancy of Asian ESG leaders over the
broader market – sometimes known as “Virtue Premiums” – can be attributed to the
fact that the development of ESG practices in Asia is still at a nascent stage.
This has indeed made ESG stocks more appealing in Asia to discerning investors such
as Warren Buffett, who tend to stay with these virtuous companies rather than
flipping shares for short-term gains. This can also help lower the turnover
rate, helping institutional investors to improve their long-term Alpha (excess
1 Source: International
Monetary Fund (IMF) Asia Pacific Regional Economic Outlook Update, October 2017
2 Source: MSCI ESG
Research, the MSCI AC Asia ex Japan ESG Leaders Index is a capitalization
weighted index that provides exposure to companies with high Environmental,
Social and Governance (ESG) performance relative to their sector peers. MSCI AC
Asia ex Japan ESG Leaders Index consists of large and mid-cap companies across
2 of 3 Developed Markets (DM) countries (excluding Japan) and 9 Emerging
Markets (EM) countries in Asia.