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Stewardship in Asia, a source and a victim of climate change

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BNP Paribas Asset Management
 

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Asia is a major contributor to climate change and at the same time quite exposed to its phenomena such as droughts and floods. That makes engaging with companies and working with the authorities in the region all the more important for investors such as BNP Paribas Asset Management. Six questions for Paul Milon, head of stewardship Asia Pacific.

Asia has been taking a more active role in addressing climate change, with net-zero emissions pledges by China, Japan and South Korea. Is the region catching up?

Climate change has a considerable impact on Asia, including in terms of physical risk such as more natural disasters occurring. Just think of the number of typhoons and droughts the region has experienced. So, climate action matters. According to WWF, failing to achieve climate objectives could mean that the number of people suffering from floods every year in South Asia would rise from 13 million to 94 million.

Asia is also a region that makes an impact on climate change: China alone contributed over 27% of total global emissions, far ahead of the US with 11% (although on a per capita basis, the US are well ahead).

Since Asia – the world’s largest regional economy – is growing at a faster rate than the EU and US, CO2 emissions there can be expected to keep increasing if we cannot decouple emissions from economic growth. The effects of climate change, however, differ across the region (see exhibit 1).

Exhibit 1 - Asian countries with lower levels of per capita GDP are most at risk from the impacts of climate change

It is fair to say that we can’t achieve the worldwide climate goals without leadership from Asia, including China, which is the largest global emitter of greenhouse gases (GHGs). So these pledges are important: they set the direction of travel for corporates and regulators, i.e. towards net zero.

Accordingly, they indicate how business models should evolve to align with these national objectives. We have seen this in China: after Beijing’s net zero pledge, companies in sectors from energy to finances have announced their intention to align with the country’s emissions goals.

The EU has been leading the world on regulatory developments such as SFDR. [1] What is happening in Asia?

Asia has been catching up. Regulators are taking an active role. We are seeing regulatory developments over how companies should be run, such as setting ESG [2] disclosure rules, and how investors should invest – think of stewardship codes and guidelines. Regulators are also increasingly looking at product labelling and what can be considered a green or ESG fund to fight the risk of ‘green washing’ or ‘ESG washing’ and make it clear which funds are sustainable.

In addition, investors such as BNP Paribas Asset Management are taking part in initiatives such as Singapore’s Green Finance Industry Taskforce and Hong Kong’s Technical Experts Group. Investors and regulators are working together to make progress in this area.

You mentioned stewardship. Can you tell us more about your activities related to the energy transition?

We are working with Climate Action 100+ on ensure that the world’s largest GHG emitting companies take the necessary action on climate change. In Asia, we are leading, or co-leading, engagement with three companies.

So, as an example, we are talking with China Petroleum & Chemical Corporation (Sinopec) about its intention to target net zero in line with China’s national target and to come up with concrete ways to first peak carbon dioxide emissions, and then deliver on the net-zero objective, including via research projects related to green hydrogen.

We also have been engaging with Asian electric utilities as part of our (divestment from) coal policy. [3] Asian power utilities have a critical role to play in achieving both local and international climate goals as they represent a combined 23% of global GHG emissions. So we believe there’s an opportunity to engage with these companies, to identify which companies are actively reducing their reliance on coal and synchronising the carbon intensity of power generation with a ‘Paris-aligned’ trajectory.

Gender diversity is a hot topic: Asian companies tend to have fewer women in senior management. How do you go about promoting greater diversity?

Board gender diversity expectations have risen from at least one female board member to now 15% of members being women in Asia and most emerging markets. Similarly to what we’re doing in Europe and North America – where we expect 30% to be women – we are engaging with companies that we consider key holdings in our Asian portfolios ahead of the annual shareholder voting season.

We select those companies that have at least one female board member, but fail to currently meet our 15% threshold to share our expectations. These dialogues have been a way to discuss their strategy to promote not only board gender diversity, but also broader diversity and inclusion across the firm. After these engagements, a few companies have aligned their gender diversity efforts with our expectations or committed to meeting our board gender diversity expectations within two years.

BRAND NEW Exhibit 2 Average percentage of women on boards Asia

Biodiversity is now also at the forefront of sustainability issues. Is it an area you’re also looking at?

Biodiversity and broader sustainability issues have been lower on the agenda for a number of companies in the region, compared to climate change, for instance. However, Asia actually has both a high impact, and high dependencies, on natural ecosystems, for example, forest and water.

Forest is a well-documented area, with deforestation risks related to palm oil and timber plantations. If we take water, companies’ operations are at risk of disruption from either too little water or too much. Every year, droughts in parts of India halt production for the beverage industry and other water-intensive industries. Recently in Taiwan, a drought led local governments to prioritise water access for local populations, affecting the water-intensive semi-conductors industry.

On the other side of the spectrum, Asia is vulnerable to natural disasters due to an excess of water as you may remember from the 2011 floods in Thailand disrupting the supply chains of global carmakers and electronics companies. Lastly, with many key Asian cities sitting in coastal areas, typhoons and sea-level rise can have material business implications for companies.

We’re currently working with the CDP, an NGO, to engage with portfolio companies that have a high impact – and reliance – on water and forests to encourage them to integrate such issues in their strategy, improve practices and enhance disclosure.

[1] Read An introduction to the Sustainable Finance Disclosure Regulation.  As  part of the Europe’s Action Plan for financing sustainable growth, the SFDR provides greater transparency on the degree of sustainability of financial products. The objective is to channel private investment towards sustainable investing.

[2] On environmental, social and governance issues and risks

[3] What should investors expect from a responsibly run company? How should companies behave when it comes to issues such as human and labour rights, protecting the environment or anti-corruption safeguards? Read Responsible business conduct – a major pillar of sustainable investing

Also listen to the podcast with Paul Milon on Asia as a good place to change climate change


Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. The views expressed in this podcast do not in any way constitute investment advice.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

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