Why being responsible does not mean underperforming in SE Asia

Investment opportunities are ripe, but it pays to know the CSR terrain.

Across the Asia-Pacific region responsible investment has so far only gained a foothold. The number of mutual funds is respectable at about 163, but assets under management are only worth about US$25bn (€18.3bn). This is tiny when compared to the US$2.3 trillion in assets reported by the Social Investment Forum in the US for 2005 or the €1.2 trillion in estimated assets in Europe. Add in private equity funds, hedge funds and SRI mandates and the figure for Asia-Pacific rises to around 180 funds worth about US$32bn. When Syariah (sharia) funds are included a further 90 or so products can be added. Syariah funds are ethical investments by definition and most popular in Malaysia, which has now developed the largest Islamic financial market in the world. Even so, the total net value remains no more than a niche. This is a real shame because there are plenty of Asian companies with excellent corporate and social responsibility (CSR) and there are huge opportunities for good returns on responsible investment portfolios across the region. Looking at two Asian SRI Indicesshows that the numbers speak for themselves. In Singapore the OWW Responsibility SRI Index has full-year returns to 22nd August of 34.4% compared to 33.4% on the benchmark Straits Times Index (STI). Peak returns for the full-year are 47% on both indexes. In neighbouring Malaysia returns were slightly lower but still respectable. Full-year returns were 29.0% on the OWW Responsibility SRI Index compared to
32.0% on the benchmark Kuala Lumpur Composite Index (KLCI). Peak returns are 44.5% on the former compared to 47.8% on the latter. Compare that to the 2.8% full-year returns on the UK FTSE4GOOD and 6.3% on the UK FTSE100 over the same period and you can see why Asia stocks offer such potential. The maximum return on FTSE4GOOD since August last year was only 13.6%, less than half what you can get on SRI stocks in Asia. Volatility has always been an issue for Asian investors who are still haunted by the 1997 Financial Crisis. But this is where responsible investment can offer an attractive defensive alternative.
Our indices both have lower betas than the market, so they are less risky and they also appear to have firmer floors during downturns.
In the crisis caused by jitters in Shanghai just after the Chinese New Year at the end of February this year, the Malaysia SRI Index fell 11.7% compared to a 12.7% fall on the benchmark KLCI and in Singapore the OWW SRI Index fell 9.2% compared to 9.8% on the STI.
Since their peak at the end of July this year, the Malaysia KLCI benchmark has fallen 10.7% compared to 9.5% on the OWW Malaysia SRI Index and in Singapore the STI has fallen 9.4% compared to 7.6% on the OWW Singapore SRI Index.
With this financial background an obvious question is: why is responsible investment in Asia not as buoyant as elsewhere?
There are many reasons, but amongst the most important is a lack of credible information and nagging doubts about the relevance of responsible investment in the Asian context.
Environmental, social and governance (ESG) information on Asian companies is frustratingly difficult to find. Some of the leading ESG research houses such as EIRIS or Vigeo cover Asia Pacific but are often forced to report large gaps. This is not because companies are poor on CSR, it’s just that they don’t report well. In Singapore for example the annual ACCA Singapore Environmental and Social Reporting Awards (SESRA) had only 11 entries for 2006, whereas in Malaysia the MESRA programme had more than 60 nominations. Even so, the winners in Malaysia were the tobacco company BAT and the oil giant Shell, both of which have obvious reasonsto report their CSR. Other nominees often reported little more than, “mock cheques.”
There is also a nagging doubt amongst many in the region about why responsible investment is creating such a fuss. Chief executives of companies that are Syariah compliant, for example, often ask why they have to go further to satisfy western investors.

“There are plenty of Asian companies with excellent corporate and social responsibility.”

The shake-up in corporate governance and transparency for instance is also often seen as an unwelcome consequence of failures in US and European governance rather than in Asian governance. Many of the reforms demanded by western standards of ESG, including independent board members, are viewed with scepticism and seen as little more than window dressing with no material impact on company performance.
It is a valid point. First, truly independent board members are difficult if not impossible to find in Asia. Second, many multinationals which have local independents on their boards set their fees on the basis of performance, severely compromising the degree to which they can express independent opinions. Third, in communities where family owned businesses are still commonplace, the idea that someone with no links to the company would care more about its performance than family members is difficult to swallow for many. The same is true of other issues central to conventional western ESG.

Environmental issues for example, high on the agenda since Al Gore’s movie, are often seen as problems of the west, not of Asia. Outside of China and India most Asian countries have negligible greenhouse gas emissions, especially per capita. Many companies ask why they should go to the trouble and expense of monitoring, reporting and reducing their environmental impact whilst US consumers pump carbon dioxide into the air without any obvious penalties.
Instead social issues such as fair pay and decent employment practices are higher on the agenda of many people in Asia. These are just the sort of issues that multinationals are most likely to shy away from, especially when they see demands for fair collective bargaining schemes or better pay and benefits that would cut their margins and damage their competitiveness against China.
Despite these issues, the SRI market in Asia is growing and has potential to grow further since Asian demographics fit closely with the profile of SRI investors and so provide a large potential market for SRI products in the region.
Demand is also rising amongst international SRI Fund managers such as ABN AMRO, looking to diversify their portfolios by including Asia SRI stocks. This is likely to be bolstered by local institutional demand in the medium term.SRI stocks are also increasingly preferred by governments and state pension schemes across Asia. This helps to underpin their base of equity holders. Significant SRI mandates exist in New Zealand and Korea and will be introduced soon in Malaysia through the Employees Provident Fund (EPF), the state pension fund KWAP and the government investment arm Khazanah Nasional.
Around the region, many countries are actively promoting CSR. In Malaysia the Prime Minister Abdullah Badawi sees CSR as a central part of his campaign to
embed ethics into the business culture. In his 2007 Budget speech, he announced a CSR reporting requirement for all listed companies and increased tax incentives from 5% to 7% for good SRI initiatives. Indonesia is also looking at this area and the Stock Exchanges in Thailand and Singapore are beginning to develop SRI capability.
Although at an early phase, responsible investment in Asia provides huge, if uncharted, opportunities for anyone willing to look beyond the confines of the west.
Geoffrey Williams is managing director and CEO at OWW Consulting, Singapore and Malaysia