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## **ESG DISCLOSURES: LOOKING BEYOND THE SURFACE**
Sustainable investing is more than about seeking companies with top-notch environmental, social and governance (ESG) profiles.

Across emerging markets, corporate ESG disclosures are uneven, and therein lies the opportunity for investors who look beyond the surface, according to Franklin Templeton Emerging Markets Equity’s Andrew Ness and Preyesh Patel.

Sustainable investing is more than about seeking companies with top-notch environmental, social and governance (ESG) profiles. It is also about uncovering companies that are improving their ESG footprints, and their disclosures go a long way toward signaling and evidencing such progress. Yet, across emerging markets (EMs), corporate ESG disclosures are uneven and broadly lag those in developed markets (DMs).

Investors relying solely on published information to assess EM companies’ sustainability efforts and ambitions risk missing the mark significantly. Therein lies the opportunity for investors who can look beyond the surface. In our decades of investing in EMs, we have developed insights into companies’ sustainability journeys through our local research and longstanding engagement with managements.

We distil three key observations from our analyses and experience:

- EM companies are not entirely behind their DM peers in ESG disclosure. Firms in select EMs have been more transparent. Also encouraging is the increasing openness that EM companies have displayed in recent years. Our local presence is an advantage here as we are often able to establish deeper insights though our relationships with companies.
- Market-wide ESG policies and initiatives are gaining ground in EMs. We expect this trend to boost companies’ ESG disclosures and public accountability. In fact, we have been heavily involved in driving the agenda around policy advocacy.
-  Investors can advocate better disclosures and other improvements through engagement with companies, regulators and other stakeholders. The relationships of trust we have built often give us the leeway to discuss material issues and help shape change.

We believe that some of the most overlooked sustainable investment opportunities in EMs lie in companies making positive ESG transitions. Evolving ESG disclosures—and their impact on investors’ ability to perceive and position for these transitions—will be key to watch.

## A VARIED DISCLOSURE LANDSCAPE
Sustainable investing is often associated with the search for ESG leaders, but that focus can overshadow the investment opportunities that also lie in companies boosting their ESG credentials. This pitfall deserves particular attention in EMs, where a general perception of their ESG gap relative to DMs has kept them off some sustainable investors’ radar. That caution has persisted despite EMs’ growing ESG awareness over the years. To some extent, EM companies’ ESG reporting shortfalls may have held back investor confidence. Using Bloomberg’s ESG disclosure scores as a proxy, we see that EM companies as a whole trailed DM firms in the amount of ESG data that they reported publicly.1 By individual market, however, the picture is a lot more nuanced. Levels of corporate ESG disclosure varied widely across EMs, with select markets such as Malaysia and Brazil faring better than the United States. Markets such as Taiwan and India also scored comparably well. Taking a broad-brush view of EM companies’ disclosure deficit would discount the pockets of strong reporting practices that exist.

What we also find promising is the growing transparency that most EM companies have shown. Over the past few years, corporate ESG disclosure scores rose more for EMs than for Europe and Japan.2 The faster pace of advance for EMs could partly reflect the lower base that they started from, and we think they have room to progress further.

Bright Spots in Emerging Market Corporate Disclosures
Market Average Bloomberg ESG Disclosure Score (0-100)
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Source: Bloomberg. Latest data as of FY2020 (or, if unavailable, FY2019). Proprietary Bloomberg score based on the extent of a company’s ESG disclosure. Companies that are not covered by ESG group will have no score and will show N/A. Companies that do not disclose anything will show a value of ‘0.’ The score ranges from 0.1 for companies that disclose a minimum amount of ESG data to 100 for those that disclose every data point collected by Bloomberg. Each data point is weighted in terms of importance, with data such as Greenhouse Gas Emissions carrying greater weight than other disclosures. A consistent list of topics, data fields, and field weights apply across sectors and regions. This score measures the amount of ESG data a company reports publicly and does not measure the company’s performance on any data point. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results. Important data provide notices and terms available at www.franklintempletondatasources.com.

## TOP-DOWN POLICY TAILWINDS
ESG disclosures in EMs have improved along with the introduction of market-wide ESG policies and initiatives. We expect this trend to accelerate as regulators and investors become increasingly ESG-conscious, and especially as interest in sustainable investing grows. Stewardship codes, corporate governance codes and other directives play an influential role in encouraging disclosures.

Several EMs with above-average Bloomberg ESG disclosure scores have continued to strengthen their policies. Taiwan, for example, launched a new three-year corporate governance roadmap for listed companies in 2020. As part of measures to enhance information transparency, more companies would have to issue sustainability reports. With Chinese being the predominant language in Taiwan, our analysts’ local language skills are often pivotal for accessing critical information here.

India began to apply a stewardship code for mutual funds in 2020, urging institutional investors to boost their monitoring of investee companies and engagement with them. This year, policymakers expanded the scope of companies’ business responsibility reports, requiring them to file more quantifiable and granular ESG information.

Meanwhile, certain EMs lagging their peers in ESG disclosures have sought to improve. South Korea’s state pension fund and leading institutional investor National Pension Service adopted a stewardship code in 2018, galvanizing a push for greater corporate accountability in the country. While Korea could benefit from a clearer corporate governance roadmap, it has implemented some long-awaited reforms.

China’s relative weakness in ESG disclosures belies its considerable step-up over the years. Although China does not have a stewardship code, the China Securities Regulatory Commission (CSRC) released a new corporate governance code in 2018. This year, the CSRC revised annual and semiannual reporting rules for domestically listed companies, requiring them to disclose environmental and social responsibility information under a separate section. The new rules are a meaningful signal of positive change, especially in light of China’s carbon neutral pledge and overall elevated emphasis on ESG. In our view, China’s move toward mandatory ESG reporting will also likely improve the quality of disclosures that we see from companies.

## STOCK EXCHANGES PAVE THE WAY FORWARD
Also noteworthy are stock exchange initiatives aimed at boosting listed companies’ ESG practices—and drawing sustainability-focused capital to their markets. Some 93% of EMs have stock exchanges that are members of the Sustainable Stock Exchanges initiative, a United Nations (UN) partnership program that explores how bourses can enhance ESG performance and encourage sustainable investment.3 Some stock exchanges have actively pushed for more ESG disclosures. In the Middle East, where disclosure rates have largely trailed both EMs and DMs, almost all exchanges have communicated the need for companies to incorporate ESG considerations into their business strategies and reporting. Several exchanges have developed ESG reporting guidelines for companies. Some, including Tadawul stock exchange in Saudi Arabia and Boursa Kuwait, have announced plans to launch ESG indexes.

We expect ESG indexes to advance the sustainability agenda considerably. Companies seeking inclusion in such indexes have powerful incentives to meet qualifying ESG criteria and report the relevant metrics and targets. Increased disclosure, in turn, deepens their public accountability on ESG issues and could spur them on to bolster their ESG credentials. Taken together, we think that ESG policies and initiatives have a favorable impact on corporate behaviors.

Backing our belief, we have seen many EM companies display increased shareholder friendliness over the years, often reflected in a greater willingness to repurchase shares or raise dividends. In line with the latter, the overall dividend payout ratio in EMs climbed from 36.2% at end-2017 to 48.6% at end-2020.4 South Korea has been one of the strong improvers on this front, riding on the momentum of policy shifts in the country. Improved corporate behaviors could also manifest in stronger business models and earnings quality, as well as lower ESG risks. Market recognition of all these changes could drive upward valuation re-ratings.

## THE VALUE OF RESEARCH, ENGAGEMENT AND PARTNERSHIP
Recall that ESG disclosures across EMs are uneven. While third-party ESG ratings are available, research agencies differ in their scope and focus of company coverage. Data gaps and subjectivity can also lead to inconsistent ratings.

At times, we have found companies receiving low ESG grades, more due to patchy disclosures than to fundamental problems. We use published information as a starting point for research and incorporate our own findings to form forward-looking views on companies’ ESG prospects. The additional work requires in-depth local studies of individual markets and companies, as well as first-hand access to managements and other stakeholders.

Our engagements go beyond the corporate level. We have frequent discussions with regulators, stock exchanges, corporate governance bodies and other stakeholders in our advocacy of sound capital market policies, which can have a far-reaching impact on economic development, corporate behavior and investor interests. We are also members of select stock exchange committees that discuss ESG and other issues.

We believe that meaningful ESG improvements take time. This makes sustainable investing a lot about identifying companies seeking or making progress on their ESG journeys, just as it is important to spot existing ESG leaders. However, varying levels of ESG disclosures in EMs are likely to keep investors from getting a full view of companies’ ESG direction.

Even amid growing transparency, we still find proprietary on-the-ground research and sustained company engagement vital in discerning businesses’ sustainability commitment and intentions. Our experience investing in EMs has shown us the difference that deep relationships with companies can make. Mutual trust and two-way communications often pave the way for us to partner with them in exploring and shaping improvements in ESG disclosures and other areas. All this work, if done well, could add up to a competitive advantage in spotting ESG advancers before the rest of the market has adequately priced in their prospects.


**ENDNOTES**
1. Source: Bloomberg. Latest data as of FY2020 (or, if unavailable, FY2019). Proprietary Bloomberg score based on the extent of a company’s ESG disclosure. Companies that are not covered by ESG group will have no score and will show N/A. Companies that do not disclose anything will show a value of ‘0.’ The score ranges from 0.1 for companies that disclose a minimum amount of ESG data to 100 for those that disclose every data point collected by Bloomberg. Each data point is weighted in terms of importance, with data such as Greenhouse Gas Emissions carrying greater weight than other disclosures. A consistent list of topics, data fields, and field weights apply across sectors and regions. This score measures the amount of ESG data a company reports publicly and does not measure the company’s performance on any data point. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges.

2. Source: Bloomberg. Data based on change from FY2017 to FY2020 (or, if unavailable, FY2019). Proprietary Bloomberg score based on the extent of a company’s ESG disclosure. Companies that are not covered by ESG group will have no score and will show N/A. Companies that do not disclose anything will show a value of ‘0.’ The score ranges from 0.1 for companies that disclose a minimum amount of ESG data to 100 for those that disclose every data point collected by Bloomberg. Each data point is weighted in terms of importance, with data such as Greenhouse Gas Emissions carrying greater weight than other disclosures. A consistent list of topics, data fields, and field weights apply across sectors and regions. This score measures the amount of ESG data a company reports publicly and does not measure the company’s performance on any data point. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges

3. Source: Sustainable Stock Exchanges Initiative (member list cross checked with current list of emerging market countries based on the MSCI EM Index), May 2021.

4. Source: Bloomberg, as of December 2020. Based on MSCI Emerging Markets Index. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges.

**What Are the Risks?**

All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Special risks are associated with investing in foreign securities, including risks associated with political and economic developments, trading practices, availability of information, limited markets and currency exchange rate fluctuations and policies; investments in emerging markets involve heightened risks related to the same factors. To the extent a strategy focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a strategy that invests in a wider variety of countries, regions, industries, sectors or investments. China may be subject to considerable degrees of economic, political and social instability. Investments in securities of Chinese issuers involve risks that are specific to China, including certain legal, regulatory, political and economic risks.

Impact investing and/or Environmental, Social and Governance (ESG) managers may take into consideration factors beyond traditional financial information to select securities, which could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. Further, ESG strategies may rely on certain values-based criteria to eliminate exposures found in similar strategies or broad market benchmarks, which could also result in relative investment performance deviating.

There is no assurance any estimate, forecast or projection will be realized.

ESG Disclosures: Looking Beyond the Surface

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**‘Bad’ stocks: Is excluding companies the only way forward?**

One of the most typical strategies of responsible investing is to simply avoid companies that are not harming the environment or society. 

Some stocks are generally excluded from portfolios, such as controversial weapons or more recently tobacco, but exclusions alone do not bring a significant impact on the world.  
Sometimes, companies with a low sustainable rating might have more room for growth and improvement in the long term so it’s important for investors to remain diversified and consider each company and approach individually. 

For example, some oil or fossil fuel polluters have stepped up their games and are now making big advances in the renewable space.  

Some of the largest and profitable energy firms, such as BP are showing improvement in their sustainability efforts, such as reducing their CO2 emissions and showing their progress towards a lower carbon footprint in a more transparent way. 

This is one of the reasons why some investors, like Amundi, are against excluding or divesting from some companies with historically poor ESG performance. Amundi is part of an approach to support, not exclude, these companies, in order to encourage them  to improve and change their practices. 

‘The objectives are that the biggest number of companies are changing their business models in order to make the climate a place where we can move on. They have the incentives to adapt. We believe in this best-in-class approach for investment, combined with an ongoing dialogue and engagement with issuers,’ says Elodie Laugel, chief responsible investment officer at Amundi. 
So, to what extent should investors focus on exclusion when it comes to responsible investing? 
Exclusion remains a powerful sanction, but is not without its drawbacks. ‘To make a difference, you cannot just exclude [companies], because if you exclude, you give up the ability to influence the company’s behaviour in the future you don’t engage,’ says Vincent Mortier, group deputy CIO at Amundi.  

This means that Amundi will underweight a certain firm it considers as a laggard, but it will still engage with it to trigger change.  

A best in class approach is also necessary to ensure proper portfolio diversification [1], added Mortier. 

In fact, responsible investing and environmental, social and governance (ESG) has become one of the best signals for determining stocks and their value.  

As more people became interested in responsible investing, they have tended to focus on the best ESG stocks (such as those linked to climate change), which has increased their appeal. Outperformance has also depended on trends or certain factors being addressed properly, but overall it is proven that companies doing their homework on their responsibilities on the environment, society and governance perform better than those who do not, Amundi explains. 

‘Prior to 2014, there was no clear outperformance from ESG investing. A break happened in 2014, with growing investor mobilization across equity and debt markets: ESG investing became a source of outperformance since 2014 in Europe and North America,’ Mortier says. 

Amundi excludes companies involved in anti-personnel mines, cluster munitions, as well as chemical and biological weapons. In addition, Amundi implements specific and targeted sectoral exclusion policies for coal and tobacco in its active funds (see graph).

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* Exclusion policy as of 31st December, 2020.

Sources:[1] Diversification does not guarantee a profit or protect against a loss

IMPORTANT INFORMATION  
Unless otherwise stated, all information contained in this document is from Amundi Asset Management S.A.S. and is as of 1 December 2020. Diversification does not guarantee a profit or protect against a loss. The views expressed regarding market and economic trends are those of the author and not necessarily Amundi Asset Management S.A.S. and are subject to change at any time based on market and other conditions, and there can be no assurance that countries, markets or sectors will perform as expected. These views should not be relied upon as investment advice, a security recommendation, or as an indication of trading for any Amundi product. This material does not constitute an offer or solicitation to buy or sell any security, fund units or services. Investment involves risks, including market, political, liquidity and currency risks. Past performance is not a guarantee or indicative of future results. All investors should seek professional advice prior to any investment decision, in order to determine the risks associated with the investment and its suitability. 

Date of first use: 10 January 2021 


‘Bad’ stocks: Is excluding companies the only way forward?

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ESG Essentials Brochure 4: A perspective on responsible investment trends

If your main objective is to grow your money, investing can be a great alternative to using a savings account. By investing, your aim is to grow your wealth in real terms over time. To learn more about what kind of investor you are and to find out more on investing, take our investIQ test here: www.schroders.com/investIQ

Schroders investIQ: Investing in a nutshell

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Climate change: investing for a sustainable tomorrow

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Ethical investments have never been hotter. Assets under management in all investment strategies governed by environmental, social and governance (ESG) principles grew more last year than in the preceding decade1.

While many of you will be familiar with the US$1 trillion green bonds market, issuance of other debt securities designed around ESG considerations has been gathering pace.

For example, new social bond issues totalled US$165 billion in 2020, up from US$18 billion in 2019. Sustainability bond issuance hit US$75 billion in 2020, from US$43 billion a year earlier. Sales of both instruments are on track to more than double this year, according to Bloomberg data.2

Much of this activity can be attributed to a combination of regulatory pressure, rising corporate awareness and investor demand. The popularity of this investment theme has also been boosted by growing awareness of the social problems that have worsened during the pandemic.

While we applaud the amazing speed of this growth, we’re also concerned. When markets move this far this quickly, inevitably some corners end up being cut. We see a risk that money will flow into investments whose ESG credentials don’t stand up to closer scrutiny.

**Sustainability-linked bonds**

Take the growing popularity of sustainability-linked bonds (SLBs). SLBs allow borrowers to set a sustainability target, while committing to pay a penalty if they fail to achieve that target.

Investors are attracted to them because issuers are tied to specific outcomes rather than a simple expenditure goal. This, in theory, more closely aligns the interests of borrowers with those of investors who want a clearer idea of the positive effects of their capital.

Bank of America expects global SLB issuance to hit some US$100 billion by year-end.3 This is extraordinary considering this market only started in 2019, and just US$9.5 billion of SLBs were issued in the first quarter of this year.

Although this is global data, we’ve also seen SLB issuance grow with the same momentum in Asia. What’s more, European markets will likely be fertile ground given the region’s history at the forefront of developments in responsible investing.

**What’s the problem?**

Financial instruments that are marketed with an ESG label often come with a second-party opinion from a ESG ratings agency, such as Sustainalytics or Vigeo Eiris. This is to ensure alignment with a recognised framework – for SLBs this would be the International Capital Market Association’s SLB principles. This framework contains five components:

- Selection of key performance indicators (KPIs)
- Calibration of sustainability performance targets (SPTs)
- Bond characteristics
- Reporting
- Verification

The framework states that SPTs should be ‘ambitious’ and ‘beyond a business as usual trajectory’. It also requires that variation from original terms should be ‘meaningful’.

Unfortunately, these requirements are qualitative. So far, second-party opinion providers have been unable to establish requirements that are quantifiable. In particular, the issue of ‘meaningful’ variation has been problematic.

For example, all but one of the US dollar-denominated SLBs issued in the first quarter feature a penalty of less than 10% of the original coupon rate. Nearly half of these SLBs have a variation of less than 5% of the original coupon rate.4

In several cases, the coupon variation, or step-up, only applies to the final year of the SLB’s life, making the present-value impact of the potential financial cost even less significant.

What’s more, there are other examples where the measurement of KPIs and financial costs coincide with times when the bonds are callable. This gives the issuer an option to redeem the bonds early and avoid paying a financial penalty.5

**Case studies:**

- A five-year bond from Asia with KPIs that only require the installation of certain assets at a total cost of US$1 million (from annual capital expenditure of up to US$200 million). The penalty for failing to meet this target is a 25 basis points-increase to the interest rate for 15 months prior to maturity – a period of time when the bonds are callable.
- An 8.5-year bond from the US with a 12.5 basis points-coupon step-up if the issuer fails to achieve emissions-reduction targets. However, the step-up applies from the fifth year onwards – when the bond becomes callable at par.
- A 10-year bond from Asia with a KPI based on achieving emissions reduction targets. While the coupon step-up is a meaningful 75 basis points, KPI assessment doesn’t take place until nine years after the bonds have been issued. That means the economic cost to the issuer for failing to meet the target would be immaterial.

What should investors do?

‘Greenwashing’ is when a company deliberately overstates green credentials. This is a risk in the SLB market where we see great diversity in the quality of bonds. That’s why the bottom-up assessment of issuers and the specific features of individual SLBs, is critical.

Investors need to be more discerning, not skimp on due diligence, and speak out whenever they find something that needs addressing.
Investors need to be more discerning, not skimp on due diligence, and speak out whenever they find something that needs addressing.

They need to ask themselves whether an issuer is undertaking substantive changes to transform its business. Is it benefiting from the retirement of aging assets to meet its KPIs? Are the costs of failing to meet SPTs significant, immaterial, or can they be avoided?

Investors can also push issuers to improve the quality of SLB issuance by demanding:

- That KPIs are assessed on multiple dates that span most, if not all, of a bond’s life;
- Greater use of milestones to track progress on meeting KPIs over time;
- Financial penalties that reflect a higher proportion of the original borrowing cost;
- Call features don’t allow issuers to circumvent the costs of failing to meet KPIs.

Being a good ESG bond investor involves more than reading what’s written on the tin. There can be no substitute for the hard work that lies behind active investing.

1 Aberdeen Standard Investments, MSCI ESG Research LLC/Lipper, EPFR, BofA Global Research, April 2021

2 Bloomberg, April 2021

3 BofA Securities, ESG in Fixed Income Quarterly, April 2021

4 Aberdeen Standard Investments, April 2021

5 Aberdeen Standard Investments, April 2021

Sustainability-linked bonds: a new platform for greenwashing?

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Covid-19 has inflicted disproportionate hardship on women, widening the already yawning gap in gender inequality. But as well as the issue of social justice, there are powerful economic reasons for increasing diversity and inclusivity in the workforce.

It’s no secret women have borne the brunt of the fallout from Covid. Lockdowns have hit hardest at low-paid service-sector jobs typically filled by women. At the same time, women’s unpaid caring responsibilities have increased with home schooling and home working.

But as well as the issue of fairness, there’s a powerful efficiency argument for gender equality in the workplace. Increasing diversity and inclusivity in the workforce can lift incomes and growth. With populations ageing and productivity growth falling, corporate and government policy encouraging female participation in the workforce could provide a much-needed shot in the arm for the global economy.

For a start, gender differences in the workforce underscore the poor return on investment in education. Women are generally as well-educated as their male counterparts in most developed countries, or more so. Yet, they’re far more likely than men to face a trade-off between accepting paid work and taking unpaid work, including caring responsibilities. Consequently, women are less attached to the workforce. And, when they do work, they do fewer hours, fuelling the gender gaps in pay, progress and opportunities.

Our research sets out to understand what drives female participation in the workforce. We analysed data for 31 countries from 2002 to 2016. Our findings suggest five clear actions for policymakers and companies wanting to lift female participation.

1. Ensure men have access to paternity leave so the burden of child-related career breaks is more evenly shared.

The most striking finding is that higher legislated paternity-leave entitlements are significantly and positively associated with higher rates of female labour-force participation. A one-week increase in paternity leave on average increases female participation by around 3%. The benefits seem to peak at about seven weeks but continue to have net positive effects for many months thereafter.

This make sense. If women expect to take career breaks while their partners don’t, this naturally creates less attachment to the labour force. An employer considering two candidates of different genders may favour the person least likely to leave. If all parents expect to take leave, these barriers to women entering and remaining in the workforce should decline.

But higher paternity leave entitlements are only part of the solution. Men still show unswerving reluctance to take paternity leave - we must do more to incentivise men to take their entitlements.

2. Reduce tax penalties for second earners and sole parents

Women tend to be the second earners in dual-income households and are more likely than men to be single parents. Some countries impose higher taxes on second earners and sole parents, discouraging female participation. Governments should reform tax systems to level the playing field.

3. Consider both quantity and quality of female work

Many women have to juggle work with caring responsibilities. So, part-time work and flexible, short-term employment are crucial in keeping women connected to the workforce, especially during early parenthood.

For women in regular work, we found a positive relationship between employment protections and female participation. But, for temporary contracts, the opposite held – weaker protections were associated with higher levels of female participation. This suggests workplace flexibility allows easier entry and re-entry for women. Companies must find a balance between protections and providing the flexibility parents and caregivers need.

4. Strengthen performance and resilience of the overall economy

We found three economic factors closely and positively linked with female workforce participation: countries’ economic output; education; and male labour-force participation. The findings reinforce the importance of sound economic policy aimed at steady, long-term growth. As the deep recessions caused by Covid have shown, women are more likely than men to be forced from the workplace in times of economic strife.

5. Report more and higher-quality data

Finally, there’s a sparsity of good-quality, company-level data on diversity and inclusion policies. Existing legislation needs to be strengthened and expanded in scope. Without adequate information, we can’t fully understand what works in terms of improving diversity and inclusion, and how that affects corporate performance.

Implications for investors

Our research has important implications for investors. The findings can help identify countries best-positioned to boost female participation, enhance economic efficiency and tackle long-term growth challenges. The work also highlights the importance of social factors in influencing long-term economic and, hence, market outcomes. This is particularly relevant as environmental, social and governance (ESG) issues become increasingly central to investment approaches. The study gives further weight to the often underestimated ‘S’ in ESG risks and opportunities, particularly for investors with long-term strategic investment horizons.

Chart 1: Factors that influence female labour-force participation rates (LFPR)

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Source: Barro&Lee, Maddison Project, OECD, Prospered Project, World Bank, ASIRI (as of 2016)

A woman's place: gender equality in the workplace benefits all

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# How to Invest on a Tight Budget
What to do if your income doesn't quite cover the bills

When it comes to our personal finance, we all try to balance our income and spending. Ideally, your income from monthly salary, pension or other sources should cover your expenses - hopefully even with some to spare. But what if it doesn't? What if your income is not enough to pay all the bills?

In such a situation, growing your money through investing is no longer a welcome extra, but a necessity. But here, too, a balance must be struck - between the growth you need to achieve and the risk you can afford to take. 

The first thought when you are on a tight budget may be to borrow money to invest with. That is rarely a good idea, and certainly not when you can not afford much risk. There is no guarantee that you can make a return on the borrowed amount of money, and it is not even certain that you can pay back the initial amount you borrowed if things turn the wrong way on the financial markets. So skip that option.

That leaves us with two possibilities for investing to fill your income gap: either go defensive, or choose a regular income through dividends.

## Going Defensive
The most defensive way of investing is through investment grade bonds, either corporate or government-issued debt from stable countries like the US or UK. The only drawback in investing in the highest quality government bonds in the current market environment is that some carry negative interest rates, meaning you effectively have to pay to lend your money instead of getting a profit in return. But when you can't afford to take risks, it makes sense to avoid higher-yielding countries where political and economic strife can impact returns.

Investment grade corporate bonds offer a relatively low risk and the potential for a decent return. Not the highest possible return, but when you are stuck with taking only a low risk, this is the most logical option.

Equity investing combined with low risk steers us to bonds issued by companies in defensive equity sectors: most notably defensive consumer goods, healthcare and utilities. Companies with a stable and robust business model, predictable revenues and cashflows and relatively insensitive to fluctuations in the economic cycle.

Within the Morningstar Style Box, large-cap stocks in the value segment are seen as the least risky. The growth style segment is considered as carrying more risk as it contains companies with strong growth profiles but also high uncertainty about their future.

Small-cap stocks are seen as riskier than large-caps because the companies are often more specialised, so more dependent on a smaller markets, less established, and due to their smaller size have less room to cope with setbacks or economic downturns.

##Regular income
A regular stream of income to replenish an inadequate financial base could be found in dividends. Stocks with a high dividend yield provide regular cash for the investor. But dividend investing is not only about the highest dividend yield; in taking into account risk, it is also about the greatest dividend safety.

This means investors must assess whether the company is financially healthy enough to continue its dividend payments in the future at the same amount, or in the best case, let the dividend grow (either in absolute terms or in payout as a percentage of the profit-per-share). In our monthly round-up of top dividend-paying FTSE stocks, for example, we look at dividend cover as an indicator of how sustainable a company's payout is. Very high dividend yields can indicate that the share price of a company is low because there are troubles on the horizon that have scared earlier investors and made them sell the stock. 

##  Time in the Market
When your income falls short of your expenses, it can make sense to sacrifice some money to investing defensively and let time do its work: allowing your returns to compound and a regular stream of dividend to grow your money over time. Of course, there is no guarantee of investment returns or ongoing dividend payments, but when choosing the options with the least risk, some financial room should arise to bring your income in line with the expenses you face.

©2021 Morningstar. All rights reserved. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided as of the date written, solely for informational purposes; and subject to change at any time without notice. This content is not an offer to buy or sell any particular security and is not warranted to be correct, complete or accurate. Past performance is not a guarantee of future results. The Morningstar name and logo are registered marks of Morningstar, Inc. This article includes proprietary materials of Morningstar; reproduction, transcription or other use, by any means, in whole or in part, without prior, written consent of Morningstar is prohibited. This article is intended for general circulation, and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Investors should consult a financial adviser regarding the suitability of any investment product, taking into account their specific investment objectives, financial situation or particular needs, before making any investment decisions. Morningstar Investment Management Asia Limited is licensed and regulated by the Hong Kong Securities and Futures Commission to provide investment research and investment advisory services to professional investors only. Morningstar Investment Adviser Singapore Pte. Limited is licensed by the Monetary Authority of Singapore to provide financial advisory services in Singapore. Either Morningstar Investment Management Asia Limited or Morningstar Investment Adviser Singapore Pte. Limited will be the entity responsible for the creation and distribution of the research services described in this article.



How to Invest on a Tight Budget

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Saving and Investing are two terms that are often used interchangeably, but they are actually different tactics that go hand-in-hand to help you reach your financial goals. Savings typically are intended for a rainy day or short-term goals, while investing involve an asset purchase that you believe may generate a return over time. Watch the video to learn more.

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The Difference Between Saving and Investing

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Investors today are navigating uncharted waters, amidst market volatility in a pandemic world, and such uncertainties tend to result in emotions running high.

However, investors need to understand that market volatility is part of investing, and learn how to live with it. Market downturns may happen frequently, but they don’t last forever

To be able to navigate volatility and potentially emerge unscathed, it is important that investors keep three strategies in mind:

**Stay Calm**

Keep a long-term perspective and tune out the noise.

**Diversification Matters**

Diversification may reduce overall volatility and provide a smoother ride through bumpy markets.

**Remember Your Strategy**

While it may be tempting to pull out of the stock market during volatility, it is important to stick with an investment strategy.

**Navigating Market Volatility.**

When markets are choppy, it is natural for emotions to run high.
![FTSG_CAROL_IMG_0321_01.png](/uploads/FTSG_CAROL_IMG_0321_01_fda7631869.png)

*This chart is for illustrative purposes only and does not reflect the performance of any Franklin Templeton fund. Past performance does not guarantee future results. Source: © Morningstar 2021. Franklin Templeton Capital Market Insights Group. Average annual return from 12/31/2010-12/31/2020. Indexes are unmanaged and one cannot invest directly in an index. Index returns do not reflect any fees, expenses or sales charges.*

**Market downturns don't last forever.**

Investors need to understand that market volatility is part of investing.
![FTSG_CAROL_IMG_0321_02 (1).png](/uploads/FTSG_CAROL_IMG_0321_02_1_615ae2da91.png)

*This chart is for illustrative purposes only and does not reflect the performance of any Franklin Templeton fund. Past performance does not guarantee future results.
Source: © Morningstar 2021, Standard and Poor’s. Indexes are unmanaged and one cannot invest directly in an index. Index returns do not reflect any fees, expenses or sales charges.*

**What can help investors?**

Let’s look at three strategies that can help investors live with market volatility.

![FTSG_CAROL_IMG_0321_03.png](/uploads/FTSG_CAROL_IMG_0321_03_c665280015.png)

**Stay Calm.**

First and arguably the most important concept of investing is to keep a long-term perspective.

![FTSG_CAROL_IMG_0321_04.png](/uploads/FTSG_CAROL_IMG_0321_04_9b0f5e0ec8.png)

**Acting on fear may divert investors from their long-term goals.**

When faced with volatility, acting on fear and pulling money out of the market may divert investors from their long-term goals. While past performance cannot guarantee future results, keeping a long-term perspective can help during times of volatility.

![FTSG_CAROL_IMG_0321_05.png](/uploads/FTSG_CAROL_IMG_0321_05_4e1c0405ae.png)

*This chart is for illustrative purposes only and does not reflect the performance of any Franklin Templeton fund. Past performance does not guarantee future results. Source: © Morningstar 2021. Franklin Templeton Capital Market Insights Group. Indexes are unmanaged and one cannot invest directly in an index. Index returns do not reflect any fees, expenses or sales charges.*

**Tune Out the Noise.**

The perception of a portfolio would change depending on the monitoring period. A way for investors to stay calm and not act on emotions is to watch their portfolio less.

![FTSG_CAROL_IMG_0321_06.png](/uploads/FTSG_CAROL_IMG_0321_06_a28b32f282.png)

*This chart is for illustrative purposes only and does not reflect the performance of any Franklin Templeton fund. Past performance does not guarantee future results. Source: © Morningstar 2021, Macrobond. S&P 500. Analysis by Franklin Templeton Capital Group. Monitoring periods are represented by 10-year, 5-year, 3-year, 1-Year, monthly rolling periods for S&P 500 Index from 12/31/70–12/31/2020. Indexes are unmanaged and one cannot invest directly in an index. Index returns do not reflect any fees, expenses or sales charges.*

**Diversification Matters.**

Diversification is a staple of investing and may reduce a portfolio’s overall volatility and provide a smoother ride through bumpy markets.

![FTSG_CAROL_IMG_0321_07.png](/uploads/FTSG_CAROL_IMG_0321_07_79dcb35758.png)

**As markets change, your portfolio may need to evolve.**

This chart shows how various asset classes performed on a year-by-year basis over the last 15 years. No asset class has consistently offered the best return year in and year out, so investors need to have a diversified asset allocation plan.

![FTSG_CAROL_IMG_0321_08.png](/uploads/FTSG_CAROL_IMG_0321_08_f850d0197d.png)

*This chart is for illustrative purposes only and does not reflect the performance of any Franklin Templeton fund. Past performance does not guarantee future results. Source: © Morningstar 2020. Larger growth stocks are represented by the S&P Growth Index; Large value stocks are represented by the S&P 500 Value Index; Small growth stocks are represented by the Russell 2000 Growth Index; Small Value stocks are represented by the Russell 2000 Value Index; Foreign stocks are represented by the MSCI EAFE Index; Bonds are represented by the Bloom berg Barclays U.S. Aggregate Index; High yield bonds are represented by the Credit Suisse High Yield Index; Emerging market stocks are represented by the MSCI Emerging Markets Index; Global bonds are represented by the FTSE World Government Bond Indexes; Hedge Strategies are represented by the HFRX Global Hedge Index. Indexes are unmanaged and one cannot invest directly in an index. Index returns do not reflect any fees, expenses or sales charges. Diversification does not guarantee a profit or a protect against loss.*

**Why Diversify? Because Winners Rotate.**

Keeping assets properly allocated across several asset classes helps reduce overall volatility and improves your chances to earn more consistent returns over time. This chart shows how the strategy that allocates investments across several asset classes performs relatively better.

![FTSG_CAROL_IMG_0321_09.png](/uploads/FTSG_CAROL_IMG_0321_09_6f018651d6.png)

*This chart is for illustrative purposes only and does not reflect the performance of any Franklin Templeton fund. Past performance does not guarantee future results. *Annual investments are made into the best performing asset class index of the previous 12-month period. **Annual investments are made into the worst performing Index of the previous 12-month period. ***Annual investments are evenly distributed across all asset class indexes each year and rebalanced annually. Source: © Morningstar 2020. The three scenarios include large growth stocks, represented by the S&P Growth Index; large value stocks, represented by the S&P 500 Value Index; small growth stocks, represented by the Russell 2000 Growth Index; Small Value stocks, represented by the Russell 2000 Value Index; foreign stocks, represented by the MSCI EAFE Index; bonds, represented by the Bloomberg Barclays U.S. Aggregate Index; high yield bonds, represented by the Credit Suisse High Yield Index; emerging market stocks, represented by the MSCI Emerging Markets Index; global bonds, represented by the FTSE World Government Bond Indexes; hedge strategies, represented by the HFRI Fund Weighted Composite Index. Indexes are unmanaged and one cannot invest directly in an index. Index returns do not reflect any fees, expenses or sales charges. Past performance is no guarantee of future results. Diversification does not guarantee a profit or a protect against loss. Indexes are unmanaged and one cannot invest in them. They do not include fees, expenses or sales charges.*

**Remember your investment strategy.**

Review that plan when emotions are running high.

![FTSG_CAROL_IMG_0321_10.png](/uploads/FTSG_CAROL_IMG_0321_10_9a0d61558c.png)

**Dollar Cost Averaging can make it easier to cope with volatility.** 

As markets move up and down, so will the cost of your investment. Committing a fixed amount of money at regular intervals to an investment, a.k.a dollar cost averaging, can help reduce anxiety about the investment process.

![FTSG_CAROL_IMG_0321_11.png](/uploads/FTSG_CAROL_IMG_0321_11_23bdfd20df.png)

*This chart is for illustrative purposes only. Dollar cost Averaging does not assure a profit or protect against loss in declining markets. Investors should consider their ability to make regular investments during all market conditions.*

**Don't time the market.**

This chart shows the 20 worst trading days and the 20 best trading days of the S&P 500 index over the last 20 years. In many cases the best trading day immediately follows the worst trading day illustrating how difficult it is to attempt to time the market.

![FTSG_CAROL_IMG_0321_12.png](/uploads/FTSG_CAROL_IMG_0321_12_9b84d4727e.png)

*This chart is for illustrative purposes only and does not reflect the performance of any Franklin Templeton fund. Past performance does not guarantee future results. Source: © Morningstar 2021. S&P 500. Based on returns in local currency over a 20-year period ended 9/30/2020. Indexes are unmanaged and one cannot invest directly in an index. Index returns do not reflect any fees, expenses or sales charges.*

**Jumping In and Out of the Market Can be Costly.**

Just as many investors are slow to recognize a retreating stock market, many also fail to see an upward trend in the market until after they have missed opportunities for gains. An investor who stayed fully invested and didn’t miss any of the best days would have earned a significantly higher return than those who missed the best days.

![FTSG_CAROL_IMG_0321_13.png](/uploads/FTSG_CAROL_IMG_0321_13_8bfd6ef335.png)

**Key Takeaways**

1. Markets have tended to reward patient investors over long periods of time.

2. Emotions affect decision-making ability.

3. Stay calm, diversification matters, and remember your strategy.

![FTSG_CAROL_IMG_0321_14.png](/uploads/FTSG_CAROL_IMG_0321_14_d907b26eb1.png)



How to Navigate Market Volatility

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The way we grow food today is unsustainable. We are depleting our planet’s resources at a fast pace and food security for a growing population is at risk. How we use our finite land efficiently is one of the most important questions facing us today. There is one approach that we believe can help provide a more sustainable and resource-efficient solution to this vital issue – vertical farming.

This article was originally published on 12 June 2020 on Thinking Aloud.

**Vertical farm documentary**

In this short video, we visit Scotland’s first vertical farm. Intelligent Growth Systems operates an indoor plant-growing system that reduces water usage by 95%, avoids the need for pesticides and requires no sunlight.

**Food production today – what is the problem?**

Producing food is resource intensive in terms of water, energy and land. We are using natural resources quicker than the planet can regenerate. The last Earth Overshoot Day – the day we deplete nature’s resource budget for the entire year – was 29 July 2019. This is the earliest on record. Additionally, the use of pesticides has negative implications for biodiversity and health.

Food production is also vulnerable to the growing physical impacts of climate change. Warming temperatures cause heavier rains, leading to land degradation, water scarcity and soil erosion. This affects harvests and diminishes crop yields.

**Vertical farming – a potential solution**

Enter vertical farming (VF). As it sounds, VF is the practice of growing crops in vertically stacked layers indoors. VF seeks to optimise growth conditions for each plant and apply these conditions in a controlled and fully automated environment. This maximises yield and minimises environmental impacts. Vertical farms are best suited to herbs and leafy vegetables that do not grow too high or too deep in the soil. That means you can stack a lot of layers of plants in one building, making it a more cost-effective method of growing than traditional farming.

**Taking a look at Scotland’s first vertical farm**

At Aberdeen Standard Investments, we believe on-the-ground research and first-hand engagement are essential to fully understand a company, sector or investment trend.

To that end, we recently visited Scotland’s first vertical farm, developed by Intelligent Growth Solutions (IGS), an innovative agritech company established in 2013.

In 2018, IGS built its first vertical farming demonstration facility, which has allowed the team to develop and patent its breakthrough Internet-of-Things-enabled Power & Communications Platform. This platform uses Artificial Intelligence to identify optimal growth conditions for plants.

The vertical farm consists of four 40.8 square metre (sq. m) towers in an industrial block, utilising approximately 250 sq. m of land space. This is also then supported by an additional service area. Each tower can accommodate approximately 50 trays of plants. This setup is similar to a widely available automated warehousing system, and is easy to build and replace.

IGS has developed a system where conditions on each tray are managed individually. Each plant growth is supported by an optimisation algorithm and everything is controlled from a mobile application. It specifies the exact needs in terms of water, lighting, temperature and humidity by the minute, for the full growth cycle of the plant.

This state-of-the-art facility is based at the James Hutton Institute, a world leader in plant, crop, soil, land use and environmental research. Being based at the institute gives IGS access to expertise in plant science. It also means IGS can collaborate on projects that will facilitate the development of technology and demonstrate the scalability of VF – with the opportunity to deliver on a global scale.

**What benefits does vertical farming deliver?**

VF delivers significant benefits over traditional farming, as detailed below.

- Land use. VF uses significantly less land than traditional farming. At IGS’s vertical farm, each tower only requires 12% of the land compared to growing the same crops outdoors. There is also an opportunity to repurpose unused buildings for urban growth ( for example, London underground plant growth).
- Water. VF requires significantly less water than traditional farming as there is less evaporation and water can be easily recycled. The IGS farm has a closed loop irrigation system, which means rainwater is harvested, used and recycled, saving up to 95% on water usage.
- Climate resilience. VF helps increase the climate resilience of local food production. This is because crops can be grown all year, irrespective of the increasing frequency of extreme weather events, droughts and floods.
- Year-round growth. Given growth is possible 365 days a year, the number of annual growing cycles in vertical farming is much higher than in outdoor farming. This is also hugely beneficial for breeding more resistant plants quicker.
- Energy usage. A vertical farm combined with renewable energy would work extremely well, as it does not require a continuous baseload of energy and can cope with intermittency. The tower can be used to store energy and take it from the grid when needed.
- Energy can also be a concern, as keeping the vertical farm running requires energy that outdoor growth doesn’t. At IGS, each tray requires around 1 kilowatt for cooling and lighting. Maximising energy efficiency is critical. IGS’s vertical farm only delivers the lighting the plants need at a certain time and is, therefore, more energy efficient and cost effective than other indoor plant growth, e.g. a glasshouse.

On top of the energy requirements, there are additional challenges to VF. Only a relatively small number of crops are suitable for VF, but these ranks will expand as technology evolves. Start-up and ongoing costs can be high. There is also the perception that VF is ‘unnatural’. Again, we believe these will become less of an issue as the sector matures, policy support strengthens and the benefits become more apparent.

**What is the status and expected growth of vertical farming today?**

VF as a sector is in its infancy, but has the potential to change the way we grow our food. This is particularly relevant for areas with rapid population growth, strong urbanisation trends, land constraints and high vulnerability to climate change and water stress. IGS estimates the global market in VF will increase 24% per annum over the next three years.

Vertical farming as a sector is in its infancy, but has the potential to change the way we grow our food.
Its wider adoption would be most effective in drought-stricken regions, such as some areas in the Middle East and Africa. It is also suited to small and highly urbanised countries such as Israel, Singapore, Japan, Taiwan and the Netherlands. Further, VF is attractive in countries that suffer from heavy pollution and soil depletion but where demand for high-quality food is high. This would include parts of China.

To realise VF’s potential will require government policy support, including a clear strategy on how it fits into national polices. Stakeholder collaboration and education will be important. Meanwhile, there will be a need and opportunity for private and public investment. Given the levels of capital available, such investments could dramatically improve optimisation, increase scale and bring down costs.

**What does this mean for investors?**

For investors, knowledge about VF developments, the technology behind it and the sustainability benefits it delivers is relevant in a number of ways. There are likely to be winners and losers in the VF revolution. It is therefore important to understand the risks and opportunities as the sector develops. These insights can then be integrated in investment decisions and used to inform engagements.

Engaging with companies that are involved or are showing an interest in VF could afford valuable insights into the growth potential of the sector. It also provides an indication of opportunity for those publicly listed companies positively exposed to more sustainable farming.

There is potential for direct investment, too. For example, there are opportunities to fund innovative private companies that develop the technology and algorithms to optimise plant growth. Investors can also buy vertical farm buildings as real assets.

**Final thoughts…**

The way we grow food today is unsustainable in terms of land, water and energy. However, vertical farming represents an innovative way to produce better food, in a more efficient and environmentally sound way. With the right investment and engagement, VF could eventually become the food production method of choice for future generations.

Vertical farming – the future of food production

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Technological disruptions continue to transform global society in many ways, and emerging markets have embraced them. In certain industries, these technological innovations are driving economic growth and presenting compelling new opportunities for investors. Franklin Templeton Emerging Markets Equity Institutional Portfolio Manager Nicole Vettise shines a spotlight on one of these powerful new opportunities right above our heads—solar.

When it comes to the powerful long-term structural case for investing in emerging markets, we have identified several “new realities” that encapsulate the growth drivers propelling these markets forward and unleashing compelling investment opportunities.

One of these new realities is how emerging markets have leapfrogged developed markets when it comes to innovation and technology. Drilling down further, it is disruption in certain industries, the transformation of certain agile companies and the opportunity around digitization that is capturing our attention.

Solar is one opportunity we identify within this theme of disruption.

The sun is of course a remarkable source of energy—every 90 minutes it provides enough energy to power all of humanity’s needs for an entire year. However, cost and conversion inefficiencies (the amount of power generated from a given amount of sunlight) mean that only a fraction of sunlight has been effectively harnessed and distributed—that is, until now.

Advancements in technology and innovation are allowing more sunlight to be converted into energy, and the scope for future growth is considerable.

One aspect of solar that has deterred investors in the past is policy risk. This risk is falling, however, as new solar projects no longer require government subsidies, meaning that market forces should increasingly determine the price of solar power.

Furthermore, thanks to innovation, solar is now the cheapest source of energy in many countries today, so there should be even less reason going forward to use environmentally harmful fossil fuels such as coal.

Indeed, the environment and concerns about global warming are top of global leaders’ agendas.

For example, in China, President Xi has set a target for the country to be carbon-neutral by 2060 and for 25% of the energy mix to be from renewables by 2030. This is testament to China’s long-term commitment on going green, as well as its ambitions to foster a global champion industry.

With the International Energy Agency referring to solar as the “king of electricity” and expecting it to account for 80% of the growth in global electricity generation in the next decade,1 the future does appear to look bright for solar.

China is a world leader in solar production; in 2019, 71% of solar modules were produced in China vs. 3% in the United States. 2

For investors looking to tap into the opportunities presented by this disruptive secular trend, China has the two largest players in what is a highly concentrated market.

One is the world’s largest solar photovoltaic (PV) glass producer. It commands a global market share of 32% and key competitive advantages are its scale and the ability to produce increasingly thinner solar glass. All of its solar glass production uses natural gas while some of its peers are using carbon-heavy coal and oil, so this company goes further in helping to resolve climate challenges.

It also has a solar farm subsidiary and has seen impressive growth, expanding from two to 32 solar farms across China in just six years. And, it is selling its power generation into the immense Chinese electric grid.

China is also home to the second largest global solar glass producer with a 21% global market share and the overseas market representing 30% of its sales.3 The company recently expanded capacity further, starting a new operation in Vietnam. This new location offers further advantages such as relatively cheaper wages, abundant raw materials (including silica sand), cheaper electricity and tax benefits.

As Chinese electricity generators race to grid-parity with coal, independent of state assistance, it is forecasted that solar will jump from about 2% of China’s energy mix to 6% by 2023.4

So, when it comes to emerging markets leapfrogging developed markets in innovation and technology, we believe China offers an opportune investment hunting ground for identifying global leaders that are disrupting the market.

ENDNOTES

Source: International Energy Agency, World Energy Outlook 2020. There is no assurance that any estimate, forecast or projection will be realized.

Source: International Energy Agency, Photovoltaic Systems Programme, “Trends in Photovoltaic Applications 2020,” data as of 2019.

Source: Franklin Templeton research.

Source: World Economic Forum, as of December 31, 2020. There is no assurance that any estimate, forecast or projection will be realized.

What Are the Risks?

All investments involve risks, including the possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Investments in emerging markets involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size and lesser liquidity. To the extent a strategy focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a strategy that invests in a wider variety of countries, regions, industries, sectors or investments. China may be subject to considerable degrees of economic, political and social instability. Investments in securities of Chinese issuers involve risks that are specific to China, including certain legal, regulatory, political and economic risks.

Shining a spotlight on solar in China

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Strategically located at the centre of Asia Pacific, with a young population of more than 675 million across 11 countries[i], Southeast Asia is an economic block with one of the world’s fastest GDP growth rates[ii]. In recent years, the region has been attracting the attention of global investors. At the same time, in the context of responsible investing moving from a niche activity to the mainstream, research on the environmental, social, and governance (ESG) performance of Southeast Asia companies is limited.

In this article, we have a deeper look at the ESG disclosure and performance of major Southeast Asia countries, focusing on the ASEAN-6 countries (Singapore, Malaysia, Thailand, Vietnam, Indonesia, and the Philippines).

**ESG Disclosure Regimes**

All six countries require a particular form of ESG disclosure and governments provide guidelines to help issuers prepare sustainability information. All exchanges of the six countries are members of the Sustainable Stock Exchange Initiative. However, countries like Indonesia and the Philippines only had a requirement after 2020; therefore, we might see further improvement in ESG disclosure in these markets in the next few years.

Notably, in the 2019 sustainability disclosure performance ranking by Corporate Knights[iii], the Stock Exchange of Thailand ranks ninth of 47 stock exchanges worldwide, the highest of all exchanges in the APAC region. The Singapore Exchange, Philippine Stock Exchange, and Indonesia Stock Exchange rank 24, 30 and 36, respectively.

**Singapore**

The Singapore Exchange published the Sustainability Reporting Guide[iv] in 2016, which requires every listed issuer to prepare an annual sustainability report on a comply-or-explain basis. The Guide suggests issuers select a globally recognised sustainability reporting framework that is appropriate for and suited to their industry and business model and explain their choice. Issuers are also required to identify material ESG factors in financial terms. According to the Guide, the sustainability report should set out the issuer’s policies, practices, performance and targets related to the material ESG factors identified.

**Malaysia**

According to the listing requirements[v] issued by Bursa Malaysia, issuers are required to disclose a narrative statement of the management of material economic, environmental and social (EES) risks and opportunities (Sustainability Statement) in their annual reports. For the Main Market listed issuers, they must include in their Sustainability Statement the information of governance structure, the scope of the Sustainability Statement and the management of material EES risks and opportunities. Bursa Malaysia provides a Sustainability Reporting Guide and six toolkits to help issuers prepare the Sustainability Statement.

**Thailand**

In a new Corporate Governance Code[vi] issued in 2017, Thailand’s Securities and Exchange Commission (SEC) requires that company boards ensure sustainability reporting, as appropriate, using a framework that is “proportionate to the company’s size and complexity and meets domestic and international standards.” Additionally, the Stock Exchange of Thailand provides resources on its Sustainable Business Development Center website to encourage best practices. As per the SET’s guidelines, many companies choose to use the Global Reporting Initiative (GRI) as their reporting framework.

**Vietnam**

In compliance with provisions set out in Circular No.155/2015/TT-BTC[vii] issued by the **Ministry of Finance of Vietnam**, public companies should produce an annual report disclosing their environmental and social impact and objectives regarding corporate sustainability. In 2016, the State Securities Commission of Vietnam, in cooperation with the International Finance Corporation of World Bank Group, published an Environmental and Social Disclosure Guide, which is compiled based on the GRI G4 and encourages independent external assurance.

**Indonesia**

In Indonesia, all listed companies are required to publish Sustainability Reporting starting from 2020 according to Indonesia Financial Services Authority (Otoritas Jasa Keuangan - "OJK") rule number 51/POJK.03/2017: Implementation of Sustainability Finance for Financial Services Institutions, Issuers and Public Companies[viii]. Moreover, financial services providers must also submit a Sustainable Finance Action Plan, which describes their plan for implementing sustainable finance. The rule also provides guidance for sustainability reporting, including a list of content that issuers should consider disclosing.

**Philippines**

In the Sustainability Reporting Guidelines for Publicly-Listed Companies[ix] it released in 2019, the Philippines Securities and Exchange Commission requires all publicly listed companies to submit sustainability information together with their annual report on a comply or explain basis. A penalty for incomplete annual reporting will be imposed on companies that fail to do the same. The Guidelines also provides a Reporting Template which is built upon four globally accepted frameworks, including GRI Standards and the Task Force’s recommendations on Climate-related Financial Disclosure (TCFD).

**ESG Performance Comparison**

We compare the ESG performance of the ASEAN-6 countries leveraging Sustainalytics’ ESG Risk Ratings, which required the assessment of two dimensions: ESG risk exposure and ESG risk management. Exposure reflects the extent to which a company is exposed to material ESG risks. The Management component incorporates company commitments and/or actions that demonstrate how the company approaches and handles ESG issues. The scores below are all simple average of corresponding scores of all companies of the same country/region in our research universe.

Our findings show that Thailand leads the ASEAN-6 countries in terms of average ESG performance, contributed by moderate risk exposure level and relatively good management score. Vietnam and Indonesia show higher unmanaged ESG risk due to lower management score and higher exposure to high ESG risk industries such as steel, mining, oil and gas, electric utilities, and food.

Compared to the other regions, the ASEAN-6 countries on average, have a higher ESG risk than companies in Europe and North American, while in line with the APAC average. Five out of six countries, except for Thailand, lag behind the global average level.

**Exhibit 1: ESG Performance Comparison**

![ESG_SE_Asia.png](/uploads/ESG_SE_Asia_b98a982bb9.png)

*Source: Sustainalytics*


Many believe that Southeast Asia, as one of the world’s most important economic engines, has a prosperous future. As countries continue to step up their efforts to improve the transparency and management of ESG risks and opportunities, people in this area could also enjoy a more sustainable and harmonious future.

 

Sources:

[i] World Population Review (2021), “South Eastern Asia Population 2021”, World Population Review, accessed (03.05.21) at https://worldpopulationreview.com/continents/south-eastern-asia-population

[ii] International Monetary Fund (2021), “Real GDP growth”, [ii] International Monetary Fund, accessed (03.05.21) at https://www.imf.org/external/datamapper/NGDP_RPCH@WEO/OEMDC/ADVEC/WEOWORLD/APQ/SAQ/SEQ/CAQ/EUQ/TWN/EAQ

[iii] Corporate Knights (2019), “2019 World Stock Exchanges”, Corporate Knights, accessed (30.04.21) at https://www.corporateknights.com/reports/2019-world-stock-exchanges/

[iv] Singapore Exchange (2020), “Practice Note 7.6 Sustainability Reporting Guide”, Singapore Exchange, accessed (30.03.21) at http://rulebook.sgx.com/rulebook/practice-note-76-sustainability-reporting-guide

[v] Bursa Malaysia (2021), “Listing Requirements”, Bursa Malaysia, accessed (31.03.21) at https://www.bursamalaysia.com/regulation/listing_requirements

[vi] The Securities and Exchange Commission of Thailand (2017), “Corporate Governance Code 2017”, the Securities and Exchange Commission of Thailand, accessed (31.03.21) at https://www.sec.or.th/cgthailand/EN/Pages/CGCode/CGCodeIndex.aspx

[vii] The Ministry of Finance of Vietnam (2015), “Circular No.155/2015/TT-BTC”, the State Securities Commission of Vietnam, accessed (31.03.21) at https://ssc.gov.vn/ssc/contentattachfile/idcplg?dID=103390&dDocName=APPSSCGOVVN162103170&Rendition=No.155-2015-TT-BTC&filename=C155mf6Oct15DisclosureInformationSecurities%20(ban%20day%20du).pdf

[viii] Indonesia Financial Services Authority (Otoritas Jasa Keuangan) (2017), “Implementation of Sustainability Finance for Financial Services Institutions, Issuers and Public Companies”, International Finance Corporation, accessed (07.04.21) at https://www.ifc.org/wps/wcm/connect/bab66a7c-9dc2-412f-81f6-f83f94d79660/Indonesia+OJK+Sustainable+Finance+Regulation_English.pdf?MOD=AJPERES&CVID=lVXU.Oy

[ix] Republic of the Philippines Securities and Exchange Commission (2019), “Sustainability Reporting Guidelines for Publicly-Listed Companies”, Republic of the Philippines Securities and Exchange Commission, accessed (07.04.21) at https://www.sec.gov.ph/corporate-governance/sustainability-report/

ESG Disclosure and Performance in Southeast Asia

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