Trade-led economic growth in the Asia Pacific region has contributed to lifting millions of people in the region out of poverty. However, these gains have often come at the cost of overuse of natural resources, increased emissions, and rising inequalities. Can new regulatory moves make Asian trade and economic activity more sustainable? Eleanor Wragg reports.
Responsible for 41.8% of the world’s exports and 38.2% of its imports, the Asia Pacific region has an outsized impact on global trade, but has long lagged behind when it comes to addressing environmental, social and governance (ESG) issues.
Almost every year, a smoky haze rolls across Southeast Asia, as industrial-scale slash-and-burn practices in Indonesia push air quality into the unhealthy range in Singapore, Malaysia and even as far afield as the Philippines. With this trans-national air pollution crisis, as well as the choking smog of Dhaka and the peasoupers that regularly envelop large cities like Beijing and New Delhi, the population of Asia is living with the world’s poorest air quality, putting them at risk of developing heart and chronic respiratory diseases, lung infections and cancer.
While part of Asia’s pollution problem is down to increasing motorised traffic and the burning of dirty fuels for heating, a significant share comes from the manufacture and extraction of goods and raw materials destined for countries around the world. In fact, it was an uptick in nitrogen dioxide levels across China’s industrial heartland picked up by the European Space Agency’s Copernicus Atmosphere Monitoring Service that served as a first-level confirmation of anecdotal reports that Chinese factories were restarting activity after coronavirus lockdowns were lifted.
It isn’t just Asia’s environment that suffers as trade booms, but its workers, too, as serious human rights issues in its manufacturing supply chains come to light with worrying frequency.
The Accord on Fire and Building Safety in Bangladesh, signed in the wake of the 2013 Rana Plaza factory collapse in Bangladesh that killed 1,133 garment workers and injured thousands more, has led to significant safety improvements in the country. However, as quickly as one issue is dealt with, another seemingly emerges, with the latest being the current allegations – hotly denied by China – of forced labour in the cotton industry in Xinjiang.
The Covid catalyst
“Covid-19 has provided a stark and painful reminder of why the concept of sustainable trade is so critical. The primary principle which underpins sustainable trade is balance – balance between economic outcomes and the need to strengthen social capital and environmental stewardship. In order to be sustainable, trade cannot be pursued solely on the basis of economic gains and efficiencies,” says Kathryn Dioth, CEO of the Hinrich Foundation, an Asia-based philanthropic organisation that works to advance sustainable global trade.
As Asia Pacific governments scrambled to respond to the pandemic and its impact on trade flows, the initial discussion centred around supply chain resilience, with the economic ministers of Australia, India and Japan releasing a joint statement vowing “take a lead in delivering a free, fair, inclusive, non-discriminatory, transparent, predictable and stable trade and investment environment”.
However, resilience and sustainability are not synonyms, and the Hinrich Foundation warns that there are troubling signs of deterioration in environmental and societal conditions within supply chains. It points to several states in India, including Uttar Pradesh, Madhya Pradesh, Rajasthan and Gujarat, which have added exemptions to labour law on issues including working hours and safety inspections as an inducement to investment – but at the cost of workers’ rights. The foundation also highlights the close call in Indonesia, where the government scrapped a requirement for wood exporters to obtain licenses verifying their wood comes from legal and sustainably managed sources in February – only for this to be overturned in May after furious opposition from civil society and environmental groups.
Nonetheless, a growing number of governments in the region are seeking to apply the environmental lessons learned from the Covid crisis to their policy decisions, and finance is seen as arguably the most effective weapon in their arsenal.
According to the latest Morgan Stanley Capital International (MSCI) Global Institutional Investor survey, approximately 79% of investors in Asia Pacific increased ESG investments “significantly” or “moderately” in response to Covid-19, versus 77% globally.
“Once an issue for green funds and side-pockets, ESG and climate are now firmly established as high priority issues,” Baer Pettit, MSCI president and chief operating officer, says in the report, adding that 2020 marked a “profound shift” in the way institutions invest, as many companies with strong ESG practices outperformed during the pandemic.
Meanwhile, HSBC’s sustainable financing and investing survey, which polled 2,000 respondents, found that Asia has the broadest commitment to environmental and social issues of any region, with as many as 96% of investors and 92% issuers saying they regard them as very or somewhat important.
“Particularly in Asia, the conversation has moved extremely quickly, not just with clients but with investors as well,” Melissa Moi, head of Asia Pacific environment, social, governance at Bank of America tells GTR.
Measure to manage
In order to avoid greenwashing, figuring out exactly what ESG means for the region is key. In January this year, the Monetary Authority of Singapore’s (MAS) Green Finance Industry Taskforce (GFIT) issued a proposed taxonomy for Singapore-based financial institutions to identify activities that can be considered green. Its aim is to once and for all set out the kinds of industries that banks, insurers and investors should be supporting in order to achieve inclusive economic and social development.
Loosely based on the European Union’s (EU) taxonomy for sustainable activities – which the EU technical expert group on sustainable finance called “one of the most significant developments in sustainable finance, with wide-ranging implications for investors and issuers”, a key feature of MAS’s taxonomy is that it takes into account the Asian context, encompassing transition activities that allow for a progressive shift towards greater sustainability while factoring in starting positions in developing economies.
“The more standards you have, the better and more appropriate market conditions you get where you don’t get labelled as greenwashing, because you can measure, you can report on impact and you can really distinguish who is a strong ESG company and who isn’t, and then give those pricing incentives,” says Bank of America’s Moi. “That is why it is so important to have this common language for exposure and common language for measurement.”
“In the past, the EU has been at the forefront of the regulatory drive towards ESG reporting, but now the idea that ESG is a European phenomenon has completely shifted. Where the opportunity lies now is, as often tends to be the case in Asia, we can leapfrog,” she adds. “We can have these conversations that can go from idea to implementation very quickly. We are starting to see in particular larger corporates, and regional and local banks making those moves.”
Singapore is not alone in rolling out sustainable finance metrics. Malaysia’s central bank, Bank Negara Malaysia (BNM), has also put together what it calls a “principle-based” green taxonomy for banks and insurers, which it aims to roll out this year following consultations with government agencies. Meanwhile, the China Banking and Insurance Regulatory Commission (CBIRC) has recently updated its green finance statistic system, explicitly identifying goods such as soybeans, palm oil, timber, beef, cocoa and rubber as high environmental risk commodities.
“From a regulatory perspective, we are seeing many markets now pushing significantly, to the extent that a number of countries in the region have indicated that they will require climate-related stress testing on financial institutions in their markets. All of this is really shifting the way that companies are operating and looking at ESG in Asia at the moment,” says Moi.
See no evil, hear no evil?
With myriad ESG risks, making Asia’s trade more sustainable will be a mammoth task, hindered by widely differing regulatory environments, opaque corporate governance practices, and a lack of visibility into its spaghetti bowl of supply chains. However, the push by regulators to place sustainability front and centre will mean that companies trading with and operating in the region now have growing incentives to do better.
“When the offshoring trend began, large companies, typically in Western markets had almost a ‘see no evil, hear no evil’ approach about how it all happened as long as the goods arrived at the port ready to ship on,” says Peter Jameson, head of trade and supply chain finance, Asia Pacific at Bank of America. “Those days are long gone. Companies have realised that it is not good enough to just look after what is in their own stable. They are increasingly being held accountable by shareholders, customers and employees for what happens upstream, and if they don’t address this, it generates a lot of reputational risk.”
Far from out of sight, out of mind, it has become critical for global brands to be able to trace the ESG impact of their products, right along the chain.
“One part of the solution lies in knowing your suppliers, incentivising the right behaviour, and using the latest technologies to ensure actionable information flows are timely and clear to all stakeholders,” says Cynthia Tchikoltsoff, head of supply chain management, Asia Pacific at BNP Paribas, in a research note.
As part of the MAS’s green and sustainability-linked loan grant scheme, in November 2020, the French bank launched its own sustainable supply
chain finance framework to measure the ESG performance of corporates in the region, which it hopes will “facilitate a cascade of positive change” throughout Asia’s supply chains.
Beyond the E in ESG
As Asia’s strong export growth drives the global recovery post-Covid, it has an unprecedented opportunity to chart a new path for the future of trade. A slew of regulatory activity around greening trade and trade finance is a welcome development, but this is only the beginning of the journey. Focusing on non-polluting goods trade, or trade that does not contribute to deforestation, is a vital step, but as regulators across the region seek to create market incentives for corporates to adopt ESG-compliant behaviour, while at the same time assisting financial institutions to build competencies in relation to ESG practices, they must not overlook inclusion, human rights and governance issues.