ESG hedging tools and products will proliferate
Awareness is on the rise in Asia with eight out of 16 stock exchanges in the region adopting compulsory ESG reporting requirements
When the US government withdrew from the Paris Agreement on greenhouse gas emissions, many feared that it would be a signal for multinational companies to backtrack on their own climate commitments. Fortunately, it did not cause a domino effect.
Instead, the Environmental, Social and Governance (ESG) investment industry, in which climate-related metrics such as carbon emissions play a big role, has continued to grow. A recent report by the Global Impact Investing Network (GIIN) estimates that the AUM of ESG-focused assets worldwide is at least US$502 billion as of the end of 2018.
Yet there remains a lingering perception that the development and awareness of ESG investing in Asia is lagging behind other regions. But this is not the case.
According to a recent report by UBS, more stock exchanges in Asia are adopting mandatory ESG reporting. In fact, the uptake is now higher than anywhere else in the world, with eight out of the 16 stock exchanges with compulsory ESG reporting requirements located in Asia.
Some variance among reporting regimes exists. Some markets only mandate ESG reporting from large companies whom they deem have the resources to gather the necessary data. Other capital markets, including Taiwan, apply the same rules uniformly on all listed companies, regardless of the size of their market capitalization.
In fact, according to a recent ESG score developed by Bloomberg, Taiwan ranks number one in ESG disclosure in Asia following sustained efforts by local exchanges and the market regulator to encourage companies to report on their Corporate Social Responsibility (CSR) activities.
In response to rising demand for ESG-linked products, various exchange-listed products are also being introduced throughout the region, such as green bonds, used to finance earmarked environmental projects, as well as ESG-linked exchange traded funds (ETFs) and other products that weed out companies exposed to certain industries such as tobacco, nuclear energy and firearms.
Furthermore, exchanges are working with governments as well as regulatory and professional bodies to develop initiatives that encourage listed companies to compile and divulge ESG data.
This could include collaborating with industry leaders to create and promote ESG-linked products to boost uptake and educate local investors. The past years have seen movement towards introducing these products on global exchanges in other parts of the world, such as CME, Eurex and Nasdaq.
Drawing inspiration from this, discussions are already underway to launch derivatives contracts linked to popular ESG indexes in Asia.
As an example, Taiwan Index Plus Corp cooperates with FTSE to create FTSE4Good TIP Taiwan ESG Index – Taiwan’s first ESG index, which also activates the development of ESG ETF market. This in turn generates increasing demand for derivatives products that use such indexes as the underlying benchmark in Taiwan’s futures market.
This momentum recognizes that ESG indices and benchmarks are no longer niche market tools and have now entered the mainstream, requiring the hedging tools and means to manage exposure that support other parts of the investment universe.
Moreover, recent changes to the investment policies of regional sovereign and pension funds such as Japan’s Government Pension Investment Fund, Taiwan’s Bureau of Labor Funds, and Singapore’s Temasek have also accelerated the uptake of ESG investment in Asia. The prospects for future growth in the sector look bright.
Bing-Jing Huang is the CEO of Taiwan Futures Exchange.
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