The United Nation’s Principles for Responsible Investment (PRI) Progress Report published in 2008 stated that “despite serious upheaval in global credit and financial markets during the past year, interest in Environment, Social and Governance (ESG) issues as they pertain to investment management shows no sign of slowing”.

An increasing number of investors worldwide recognise the importance of integrating ESG issues into mainstream decision making in order to maximize long-range investment returns and performance of their portfolio companies and other assets they hold, as reflected by the various recent developments of sustainability indexes such as the FTSE4Good and Dow Jones Sustainability Indexes and other SRI initiatives.

Global indexes track the financial performance of the leading sustainability-driven companies worldwide and provide asset managers with reliable and objective benchmarks to manage sustainability portfolios as the basis of investment products.

In terms of ESG in Asia Pacific markets, ASrIA, a non-for-profit membership association dedicated to promoting corporate social responsibility and sustainable investment practice in the Asia Pacific region, recently stated that investors interest in ESG issues continues to grow in the region, with the number of SRI funds in Japan growing from 60 to 67, and in Taiwan from 3 to over 15 in the last few months. Hong Kong funds have jumped from around 20 to over 50, including pure SRI funds, ESG themed funds and MPF and hedge fund products. However, the current spotlight seems to still be on governance issues but there also needs explicit give attention to the social and environmental aspects including active and participative asset ownership and management. This article reviews some of the existing and latest developments for ESG issues in the Asia Pacific region. 

The PRI initiative, which has been active for nearly two years since its launch in April 2006, is an investor-led partnership between its investment industry signatories and the United Nations, via the UNEP Finance Initiative and the UN Global Compact. The PRI describes its principles as ‘voluntary and aspirational’ and states that they are intended to be non-prescriptive. The intention is to provide signatories with the opportunity to collaborate and develop knowledge and understanding in order to incorporate ESG issues into the investment decision-making and asset ownership processes. There are now 310 PRI signatories, including a handful in the major Asian economies, managing total assets of over US$12.3 trillion with the majority of the investment manager and assets owner signatories looking at long term strategies to achieve their investment objectives.

The Thailand Government Pension Fund is currently the only public pension fund to have signed up to the UN’s Principles for Responsible Investment (PRI). The Thailand Government Pension Fund attaches the Principles for Responsible Investment to investment mandates for its fund managers. Currently, the key focus is on governance, but environmental and social issues are gradually being phased in as investment criteria.

Whilst not an index itself, the Carbon Disclosure Project, an investors-led group which tracks company responses to climate change issues globally, recently launched its CDP 6 report for Asia (ex-Japan) and concluded that “Although the level of awareness and responsiveness on environmental aspects is still very low, Asian companies are making more specific disclosures of greater value to investors and that “Asia’s traditional ESG leaders are pushing hard to experiment with targets and the metrics which will define carbon leadership in Asia”

The most recent development for ESG issues in Asia is the latest in the range of Dow Jones Sustainability Indexes, the Dow Jones Sustainability Asia Pacific (DJSI Asia Pacific) and the Dow Jones Sustainability Asia Pacific 40. The DJSI Asia/Pacific tracks the financial performance of the top 20% in terms of sustainability of the 600 biggest companies in the developed Asia/Pacific markets as listed in the Dow Jones Wilshire Global Index.

Its current composition includes a total of 122 sustainability leaders – 77 from Japan, 30 from Australia, 7 from South Korea, 3 from Hong Kong (CLP Holdings Ltd, Li & Fung Ltd and MTR Corp. Ltd), 3 from Singapore (CapitaLand Ltd, Singapore Airlines Ltd and Singapore Exchange Ltd , and 2 from Taiwan (Taiwan Semiconductor Manufacturing Co Ltd and United Microelectronics Corp.) Index components are weighted based on their free float market capitalization.

As a subset of this broad index, the Dow Jones Sustainability Asia Pacific 40 Index (DJSI Asia Pacific 40) measures the performance of the largest 40 sustainability leaders in the region. Japan is clearly ahead with 29 sustainability leaders followed by 8 companies from Australia, CLP Holdings Ltd from Hong Kong, Posco from South Korea and Taiwan Semiconductor Manufacturing Co Ltd from Taiwan.

Like all Dow Jones Sustainability Indexes (DJSI), the new offering is based on assessing corporate economic, environmental and social performance. The Index is published after a global analysis of corporate sustainability across 57 industries, broken down into 19 'super sectors'. Information for the analysis is sourced from questionnaires completed by the participating companies and company as well as third party documents. Issues assessed include corporate governance, risk management, branding, climate change mitigation, supply chain standards and labour practices.

The Dow Jones Sustainability Asia/Pacific Index (DJSI Asia/Pacific) is reviewed annually and quarterly to ensure that the index composition accurately represents the top 20% of the leading sustainability companies in each of the DJSI sectors within the DJSI Asia/Pacific investable universe.

So what does a company that wishes to be on the Index need to know about the review process? The review process comprises:

1. Sector Classification

The DJSI sector classification is based on the Industry Classification Benchmark (ICB), developed by the Dow Jones Indexes and FTSE together. The system is supported by the ICB Universe Database, which contains over 60,000 companies and 65,000 securities worldwide from the FTSE and Dow Jones universes. The coverage makes the database a comprehensive tool for global sector analysis. Each of the 600 companies in the DJSI Asia/Pacific investable stocks universe is assigned – based on the company’s primary revenue source – to one of the DJSI sectors. The DJSI sectors – and their associated supersectors – are listed in the DJSI Guide Book.

2. Corporate Sustainability Assessment

All of the 600 companies in the DJSI Asia/Pacific investable stocks universe are invited to take part in SAM’s corporate sustainability assessment. Each company assessed is assigned a corporate sustainability performance score.

3. Ranking within Sectors

Analysed companies are ranked according to their corporate sustainability score within their DJSI sectors.

4. Eligible Industry Groups

Only those DJSI sectors – where the highest ranked company globally has a corporate sustainability performance score of at least one-fifth of the maximum score – are eligible for the DJSI Asia/Pacific. All other sectors – and their associated companies – are deemed ineligible and are eliminated from the review process.

5. Eligible Companies

From each eligible DJSI sector, only companies with a corporate sustainability performance score of at least half of the highest ranked company globally in the same sector are eligible for the DJSI Asia/Pacific. All other companies are deemed ineligible and are eliminated from the review process.

6. Component Selection

The target selection for each eligible DJSI sector is 20% of the companies in the investable universe in that group. In a first step, the top 15% of the eligible companies in each DJSI sector – by corporate sustainability performance ranking – are selected for the DJSI Asia/Pacific. In a second step, the eligible current DJSI Asia/Pacific component companies ranked in the buffer zone between the top 15% and the top 25% of the eligible companies – by corporate sustainability performance ranking – are selected for the DJSI Asia/Pacific.

In addition to the annual and quarterly reviews, the DJSI Asia/Pacific is also continually reviewed for changes to the index composition necessitated by extraordinary corporate actions - e.g. mergers, takeovers, spin-offs, initial public offerings (IPOs), delistings and bankruptcy - affecting the component companies and their corporate sustainability performance.

Another major index, the FTSE4Good Index Series has also been designed to measure the performance of companies that meet globally recognised corporate responsibility standards, and to facilitate investment in those companies. Transparent management and criteria alongside the FTSE brand make FTSE4Good the index of choice for the creation of Responsible Investment products.

The FTSE4Good Index Series encompasses four tradable and five benchmark indices, representing Global, European, US, Japan (benchmark only) and UK markets. The FTSE4Good benchmark indices include all companies in the broad market index, or starting universe that meet the FTSE4Good criteria. Tradable indices cover the largest 50 or 100 companies in the benchmark index, as measured by their market capitalisation. It uses a range of selection criteria which have been designed to reflect a broad consensus on what constitutes good corporate responsibility practice globally.

FTSE4Good Japan is the fifth index in the FTSE4Good Series. Launched on 21st September 2004, it enables investors to identify Japanese companies within the FTSE Global Equity Index Series which meet a set of internationally supported standards of corporate social responsibility. These companies are working towards environmental sustainability, developing positive relationships with stakeholders and upholding and supporting universal human rights. So far, it has only been developed in Japan but it would be interesting to monitor further developments on a potential Asian-wide index.

Issues such as climate change, labour rights and risk management will continue to drive corporate success and despite the current economic and financial context, sustainability remains on investor agendas and increasingly in the Asia Pacific markets. Indexes such as the DJSI Asia/Pacific and FTSE4Good indexes will allow market participants to reflect this momentum for a key investment region. The indexes inclusion criteria will need to be both challenging and achievable in order to encourage companies to try to meet them and ensure broader mainstreaming of inclusion of ESG issues in Asia Pacific markets.