Disclaimer: Views in this blog do not promote, and are not directly connected to any Legal & General Investment Management (LGIM) product or service. Views are from a range of LGIM investment professionals and do not necessarily reflect the views of LGIM. For investment professionals only.

LGIM’s engagement on ESG transparency: a closer look at Asia

Following the launch of a new engagement campaign on ESG transparency by the Investment Stewardship team, we explore why it is important that LGIM raises this topic directly with our investee companies in Asia, including China and Japan.

 

As a long-term investor with a universal owner approach, LGIM is an advocate for greater environmental, social, and governance (ESG) transparency. Given the growing consensus on the financial materiality of ESG factors, many investors like LGIM are increasingly seeking to integrate them within their investment processes. In order to understand risks and opportunities accurately, investors need access to relevant, comparable, consistent, and verifiable ESG data across markets regardless of size, geography or asset class. In other words, better transparency from companies on their ESG performance.

We believe ESG transparency is a responsibility that belongs to the board of directors. They need to ensure their company’s ESG credentials can be appropriately used by the markets to price in this information efficiently. In 2020, we issued a guide[1] on the topic to help our investee companies understand why ESG transparency matters and what LGIM’s expectations are on the topic.

In line with our continuous engagement on transparency[2], using our proprietary LGIM ESG score, we have launched a new engagement campaign to focus on laggards within our Transparency score[3] (‘T score’). Where no improvement is observed, from 2022 LGIM will be voting against the chair of the board of all LGIM T-score laggards, as previously announced in 2020.

Letters and laggards

As part of this campaign, LGIM sent engagement letters to 85 investee companies listed in five Asian markets: China (Shanghai and Shenzhen), Hong Kong, Japan, Singapore, and South Korea. We chose to focus our engagement on Asia as we overall observed a significant number of Asian companies among the T-score laggards. Also, given the increased focus of Asian regulators on ESG disclosures (see below), we believed it was the right time to bring this issue directly to the attention of our investee companies in the region. At the time of writing, 11 companies have already responded to our engagement letter.

All these markets currently have ESG disclosure rules in place, with varying degrees of strength. Given international investors’ increased focus on the integration of ESG considerations within fundamental analysis and the growth of assets under management in sustainable investing strategies[4], ESG disclosures are no longer merely “nice to have”. Regulators and exchanges are stepping up at various speeds on their ESG disclosure requirements:

LGIM supports the introduction of robust ESG reporting rules in these markets. However, we also note that the acceleration in the development of various market-specific ESG requirements carries the risk of a greater fragmentation of ESG requirements and a lack of consistency and comparability of ESG disclosures across markets. This is why LGIM advocates for the alignment of ESG disclosure requirements with international best practice and investor expectations. We believe that the consistent use by all companies globally of well-established reporting frameworks (i.e. SASB, GRI, TCFD, CDP, CDSB) will help stakeholders access data that is relevant and comparable across all markets until the introduction of a simplified and harmonised global framework[5].

Whilst this will certainly contribute to better transparency, we believe investors also have a role to play. That’s why we are using our voice as a long-term investor to raise this issue directly with the companies in which we invest on behalf of our clients. And the stakes are high: we think ESG laggards are likely to be penalised in the reallocation of capital towards ESG leaders.

 

[1] https://www.lgim.com/landg-assets/lgim/_document-library/capabilities/cc64082020-a-guide-to-esg-transparency.pdf

[2] https://www.lgim.com/landg-assets/lgim/_document-library/esg/esg-scores-quantitative-analysis.pdf

[3] The detail of our methodology is available on our website at: https://esgscores-lgim.huguenots.co.uk/srp/documents-id/dc2ca5ef-933d-4748-b221-7085515bfa04/Methodologyforratingcompanies.pdf

[4] Sustainable fund assets hit record $1.7 trillion in 2020; https://www.reuters.com/article/us-global-funds-sustainable-idUSKBN29X2NM

[5] https://www.lgimblog.com/categories/esg-and-long-term-themes/non-financial-reporting-ifrs-finally-comes-in-from-the-cold/

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