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ESG Ratings: Panacea for Asia?

Conflicting ESG ratings are confusing investors, but Asian policymakers see more potential from them, explains Wallace Chu.


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A recent MIT study attributed the frequent discrepancies in ESG ratings primarily to a divergence in measurement, implying the differences may not be able to be resolved in the near term. Professor Alex Edmans, a corporate governance and finance specialist at the London Business School, took a more positive tone, claiming human investors would benefit from the discrepancy. In reality, practitioners find fault with them, but Asian policymakers and big public investors, see further potential in ESG ratings.

Local ESG ratings

Since 2011, the Korea Corporate Governance Service (KCGS), a specialised provider supported by the stock exchange and industry groups, has provided its own ESG ratings for Korean listed companies. In China, although major rating agencies are expanding their capacity and coverage after the inclusion of China A-shares, local ESG rating agencies such as SynTao Green Finance (in which Moody’s just announced to acquire a minority stake) are more prominent. The trend for more local companies to provide ESG ratings benefits from the fact that such agencies generally have wider coverage than their global peers. It is also worth noting that local ESG ratings may more accurately reflect their cultural context, by having looser standards for labour, gender or governance, for example.  

Japan’s Model

Since 2018, Japanese pension giant GPIF has released its weighted-average ESG scores of portfolios in annual ESG reports, based on ESG ratings published by two global ESG research agencies. GPIF also encouraged Japanese companies to engage with ESG rating agencies, tripling the engagement rate to 78% - the highest in the world. The discrepancy in ESG ratings is well perceived by GPIF, so it uses two globally-accepted rating systems to enable the public to make their evaluation.            

Taiwan’s Model

Taiwan, the third largest market in the region, crossed the Rubicon by introducing the concept of ESG ratings in 2019. The latest efforts, from 2020, provide rating information from multiple sources to issuers and investors. This proactive approach may increase pressure on issuers, pushing them to chase after global standards, or face potential reputational risks. 

Ratings provide issuers more insights

Asian stock exchanges are releasing their own guidelines on ESG disclosure, while GRI standards have been widely used in the region to generate CSR reports. But in the real world, it is issuers, not investors, that have discretion over which issues are considered material - unsurprisingly resulting in CSR reports that disclose information based on the use of their budgets, instead of material issues that are of real concern to investors. 

Only when issuers regard disclosure as a key to ESG ratings do they change their behaviour to report more material information to investors. Taiwan Semiconductor Manufacturing, a regular winner of high ESG ratings, explicitly indicates that its sustainability issues were derived from not only disclosure standards, but needs from ESG rating agencies. 

Notably, a divergence in ESG ratings exists, but not for smaller issuers in Asia. These issuers are covered by just one or two ESG rating methodologies, so rather than puzzle or confuse, the ratings guide issuers to engage in more ambitious ESG projects.  

Institutions need stronger leadership

In the past few years, GPIF has shown strong leadership, which seems indispensable in Asia, to propel ESG investment in Japan. Taiwan Depository & Clearing Co, the Central Securities Depository of Taiwan, is taking the baton to unveil the first government–sponsored ESG investment solution in Asia, and indeed the world, enabling domestic investors to screen and track the ESG performance of Taiwan-listed companies. The platform enables investors to adopt a few popular strategies, such as negative/product screening and controversies monitoring and ESG ratings integration, by incorporating data from both global and local rating agencies. 

The platform may be regarded as a safe haven – it mitigates the risks and costs sometimes associated with adopting ESG strategies. Therefore, this platform might prevail over more advanced solutions, especially for smaller, domestic institutions. Since participants of the platform are natural allies, the platform may facilitate collective engagement between investors and local companies, which could prove complementary to (but not a substitute for) more organised international initiatives, such as Climate Action 100+. 

What to expect in 2020

As part of the market, we are optimistic about the change. A cement producer in Taiwan recently replaced growing profit figures with decreasing energy consumption on the first slide of its earning call presentation, for instance. Spreading changes may lead to a higher engagement rate between ESG research agencies and Asian issuers, and finally result in higher ESG ratings, provided that policymakers offer adequate incentives. 

Asian asset owners, pension funds and insurance companies have to step up their leadership roles and expand their involvement. More precisely, limited coverage of ESG ratings and scarcity of data, especially for small and microcap companies, hinders further ESG integration in Asia. Asian investors, or Asian governments, must take action on it. Considering the fact that environmental risks are the leading concern for doing business in the region, Asian markets can benefit more from tackling climate change and other ESG issues than their western peers. 

For Asian policymakers, obviously, the advantages of ESG ratings outweigh the disadvantages, in that ESG ratings act as specific and measurable indicators for companies to improve. Two playbooks are available: Korea and China developed localised ESG ratings, whereas Japan and Taiwan followed global standards. Whatever the approach, while the discrepancy between two well-reviewed ratings should not be a problem, a rating lacking information should.    


Wallace Chu is the product manager for ESG investment solutions at Taiwan Depository & Clearing Corporation (TDCC). The opinions expressed in this article are the author's own and do not reflect the view of the TDCC.

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