The urgency of climate action hangs heavy over our planet. Asia, in general, and the Association of Southeast Asian Nations (Asean), in particular, the world's most densely populated region, are both highly vulnerable to the impacts of climate change and critical players in mitigating them alongside China and India.
The first Global Stocktake held at COP28 in Dubai marked a significant milestone in global climate action, with 18 countries in Asean and East Asia updating their nationally determined contributions, estimated to cost US$11.8 trillion by 2030. But can Asean truly meet its climate targets without wholeheartedly embracing environmental, social, and governance (ESG) principles?
ESG investing has emerged as a powerful tool for aligning the private sector's financial decisions with environmental and social responsibility. It goes beyond traditional financial metrics to consider a company's impact on the environment, its social practices, and its corporate governance. ESG can be the key to unlocking Asia's climate ambitions.
Environmental impact: ESG principles encourage companies to reduce their carbon footprint, invest in renewable energy sources, and adopt sustainable practices throughout their operations. This shift towards a greener economy is essential for Asia to achieve its climate goals.
Social responsibility: Climate change disproportionately impacts vulnerable communities. Integrating social considerations into ESG ensures that the transition to a low-carbon economy is just and equitable. This includes investing in climate-resilient infrastructure, creating sustainable jobs, and empowering local communities.
Governance: Strong corporate governance fosters transparency and accountability, crucial elements for tackling climate change. ESG frameworks encourage companies to disclose their environmental and social risks, allowing investors to make informed decisions and hold companies accountable for their sustainability performance.
Post-Covid recovery saw an upward trend in ESG investment in Asean. On global debt markets, ESG-related bonds expanded to reach a peak of US$1 trillion (36.8 trillion baht) in 2022. An ongoing ERIA study identifies a two-track approach by institutional investors in Asia from the US, Europe, and Japan. The first track involves enterprises seeking foreign direct investments and needing to comply with international norms, essential for fast-growing economies like India, Indonesia, and Vietnam. The second track requires small and medium-sized economies to understand how ESG investment evolves in their capital markets context.
Stock exchanges play an essential role in realising ESG goals. Many have introduced ESG reporting as a standard for climate-smart investments. For example, the United States Securities and Exchange Commission (SEC) proposed a policy requiring publicly listed companies to disclose their direct carbon emissions, verified by a third party. While regulations will become more stringent, this also clarifies boundaries. Broad definitions of ESG with blurred boundaries have led some companies to adopt sustainable operations without climate integrity, misleading investors into greenwashing practices.
However, such practices have pushed regulators and authorities to act aggressively to ensure climate compliance. In 2021, the International Sustainability Standards Board established standards by the Sustainability Accounting Standards Board. The Asean Taxonomy for Sustainable Finance, established in 2023, guides 10 Southeast Asian economies in restructuring their financial systems toward climate-smart development.
While Asia is witnessing a surge in ESG awareness, significant hurdles remain:
- Market fragmentation: ESG regulations and reporting standards vary widely across Asian countries, creating confusion for investors and hindering the development of a robust ESG ecosystem.
- Short-termism: Many investors and businesses prioritise short-term profits over long-term sustainability. Integrating ESG considerations requires a shift in corporate culture and a focus on long-term value creation.
- ESG rating challenges: ESG rating providers often prioritise the disclosure of company policies, targets, and objectives over actual reductions in carbon emissions and intensity, adaptation, and renewable energy. This raises questions about which companies will be able to implement climate-smart practices effectively.
Despite these challenges, embracing ESG principles is not just an ethical imperative but a strategic necessity for governments and businesses to achieve their climate targets. Here's how the region can overcome these hurdles:
Establish clear ESG standards: Governments across Asia should establish clear and consistent ESG reporting standards and regulations, providing a level playing field for businesses and attracting responsible investors.
Capacity-building initiatives: Educate companies, financial institutions, and stock markets on ESG principles and best practices through educational programmes, workshops, and knowledge-sharing platforms.
Multi-stakeholder collaboration: Collaboration between governments, businesses, investors, and civil society organisations is essential for accelerating ESG adoption. Multi-stakeholder partnerships can drive innovation, share best practices, and create a supportive ecosystem for sustainable growth.
Asean's path to achieving its climate targets is inextricably linked to embracing ESG principles. By prioritising environmental responsibility, social well-being, and good governance, Asean can unlock sustainable growth and become a global leader in the fight against climate change. On this Environment Day, let's ensure future generations inherit a planet that is not just liveable but thriving.
Venkatachalam Anbumozhi is a Senior Research Fellow for Innovation, ERIA. The article marks World Environment Day.