ESG Policies and Implementation Slows in Asia

Global law firm Morrison Foerster has announced the results of its second annual Asia Funds ESG Survey.

The research shows continued demand from investors for greater accountability when it comes to ESG risk management integration, balanced with efforts by general partners (GPs) to incorporate responsible technology processes and mitigate issues around climate-related reporting and disclosure.

The report titled, Putting the Sustainability Puzzle Pieces in Place, in conjunction with AVCJ, also reveals however that Asia funds are incorporating sustainability efforts at a slower pace than last year, while GPs are weaving sustainability into the investment process, with 84% of respondents conducting non-compliance related ESG due diligence on most or all deals they consider.

In the second quarter of 2023, on behalf of Morrison Foerster, AVCJ surveyed 100 Asia-headquartered Fund GPs each with assets under management of at least US$1 billion to gain their insights on how sustainability (including economic, environmental, and social sustainability) considerations are impacting their investments and the market.

The respondents included private equity funds, credit and special situations funds, sovereign wealth funds, insurance asset managers, and pension funds. By geography, 35% of respondents were based in China/Hong Kong, 25% in Japan, 15% in India, 15% in Southeast Asia, and 10% in other Asian jurisdictions, including Taiwan and South Korea.

Highlights drawn from the survey’s findings include:

ESG resources have increased while work on sustainability policies and implementation has slowed—43% of respondents have both an ESG committee and an ESG specialist, up from 8% in last year’s report, but 90%of respondents have made no recent changes to their ESG policies or work on implementation of those policies.

Sustainability is a consideration at each stage of the investment process—84% of respondents conduct non-compliance-related ESG due diligence on most or all deals they consider, but only 23% of respondents have pulled out of an investment process after uncovering adverse ESG issues during diligence.

GPs recognize the potential for sustainability performance to drive value and return—91% of respondents have invested in a company with negative or neutral ESG credentials, expecting to increase its valuation by improving these metrics, and 84% of respondents believe positive ESG metrics will increase the valuation of a target.

Responsible tech is a key theme for investment and sustainability in 2023—80% of respondents say they have adopted or make it a requirement to adopt responsible tech at portfolio companies, while a full 20% either do not take this action or are unfamiliar with the concept.

Push for innovation in a competitive global marketplace puts downward pressure on ESG integration—50% of respondents mention that there are competing priorities for tech innovation over responsibility and social considerations at their firm.

Sustainability work goes well beyond climate-related issues, with many GPs working particularly hard to make progress on diversity, equity, and inclusion (DE&I)—73% of respondents have identified clear and measurable goals on DE&I and 58% have conducted internal training on DE&I for management and staff and/or communicated the importance of DE&I internally and externally.

Greenwashing risks spur meaningful action across operations, portfolio companies and supply chains—70% of respondents have policies regarding ESG communications or green claims by portfolio companies, up from 54% a year ago.

GPs face significant regulatory and operational challenges—53% of respondents cite the need to keep pace with rapidly evolving regulatory regimes as the most significant challenge, but the lack of transparency and reliability of ESG data comes second at 43%.

“The results of this year’s survey show that funds and GPs in Asia continue to see tangible benefits from evaluating risk through the ESG lens,” said Susan Mac Cormac, global co-chair of Morrison Foerster’s Global ESG Group.

“I have worked with companies and funds that have been doing this for well over two decades now. And the reason they remain committed to integrating ESG and sustainability considerations is that the programs we design allow them to see around corners, including preparing for emerging risks like cybersecurity and capturing opportunities like responsible tech.”