Why sustainability is Asia’s future

Asia Pacific is at the beginning of a journey that will increasingly see environmental, social and governance factors considered alongside economic drivers when decisions are made by governments, corporates and citizens.

Sustainability is coming of age in Asia. While the diverse nature of the region from a development, economic and cultural perspective makes it difficult to generalise, there is a clear shift in attitudes among governments, corporates, investors and citizens. Until recently the main question about sustainability in the region was ‘Why bother?’. Now there is a recognition that sustainability is important. How has this change come about?

This article is an excerpt from our biannual informative eBook ‘Connecting Asia Pacific’ where we share Asia Pacific insight articles.

To a large extent, Asia’s rapid economic development has prompted a realisation that change is necessary. “The impact of failing to take account of sustainability is extremely evident across the region,” explains Herry Cho, head of Sustainable Finance, Asia Pacific at ING. “For example, Asia Pacific is subject to worsening typhoons, tsunamis and other weather events while the pace of urbanisation and increasing air and water pollution are also more pronounced than in some other regions.”

Rob Carnell, chief economist and head of Research, Asia Pacific at ING agrees that growing awareness of the downsides of rapid industrialisation and urbanisation is spurring change. “China, for example, is pursuing sustainability because a growing number of its citizens want a better environment and a more inclusive society. Given the importance of maintaining stability and progress, President Xi has made it clear that sustainability is a priority for the country.”

 

Political and regulatory leadership

The UN’s Sustainable Development Goals (SDGs) have been critical to raising the profile of Environment, Social and Governance (ESG) issues. All UN members, including those in Asia, signed up to the SDGs: many have subsequently developed strategies to address SDGs such as poverty, clean energy and pollution. In some instances, new legislation and regulatory controls have been introduced to help direct the economy towards more sustainable activity.

While the SDGs span a wide range of areas, there is significant focus on global warming, says Cho. “Singapore recently held Asia Pacific Climate Week, organised by the United Nations Framework Convention on Climate Change (UNFCCC), where country representatives gathered to discuss progress,” she notes. “Generally, it is clear that the SDGs have helped to create a unified language that enables governments, companies and others to discuss sustainability and its implications for business.”

Regulators are also working to advance sustainability. China and Singapore were launch members of the Network for Greening the Financial System (NGFS), which Japan and Australia also recently joined. NGFS shares information among regulators and central banks about catalysing green finance and supportive macro-prudential changes. ASEAN is also stepping up: at its October 2018 annual capital markets forum it updated the ASEAN Green Bond Standards and introduced new ASEAN Social Bond Standards and Sustainability Bond Standards.

 

New business models

Asia’s growing commitment to sustainability is rooted in good business sense. “In the past there was a perception that making a commitment to improved ESG standards lowers returns on investment: ESG was seen as essentially charitable,” says Cho. “However, there is a growing appreciation that the adoption of sustainability standards has a positive correlation with increased profit, and in fact reduces risk.”

Sustainability has the potential to enhance profitability as demand for products with sustainable credentials grows. “Cost is no longer the pre-eminent criteria for some products,” explains Carnell. “Western consumers – and those in some Asian markets – now care about provenance and it’s valuable to be able to demonstrate a supply chain that does not include undesirable sustainability characteristics, such as deforestation or poor labour conditions.”

Sustainability also offers a way for China and other countries to move up the value chain. For example, while China’s auto industry has grown rapidly, production is still largely focused on joint ventures. Electric vehicles (EV) offer an opportunity to leapfrog the West and establish global EV brands. China’s scale and charging network give it an edge on the West; it is already the world’s largest EV producer.

China is also deriving geopolitical benefits from its commitment to sustainability, according to Carnell. “Sustainability offers China a way to demonstrate its growing global role as the US steps back from many areas,” he notes. “By aligning itself with the EU on the Paris Agreement as the US withdraws, China has gained international recognition as well as strengthening the renewables sector where China is a major equipment producer.”

 

Companies are the key

Asia is still in its infancy in terms of sustainability. The Hinrich Foundation Sustainable Trade Index 2018, which measures countries’ ability to support long-term economic growth, environmental protection, and strengthen social capital, shows that some fast-growing countries in the region have not done enough to mitigate air pollution and improve labour standards (although several middle-income countries, led by Sri Lanka, perform admirably).

“There is a need for greater understanding in Asia about what sustainability means and how environmental and social factors are linked to long-term economic performance,” says Carnell. “It’s not just about separating your domestic recycling but being equipped to deal with future growth. It’s essentially about preparing economies to prosper and move to a high income bracket, which is especially relevant in some parts of Asia.”

Global bodies and national governments can do much to foster this understanding and create the backdrop for Asia’s move to sustainability. But ultimately it is the integration of sustainability into Asian companies’ business models that will drive change, according to Michael Niederberger, head of Corporate Finance Asia at ING. As large companies in Asia increasingly adopt sustainable practices and reporting, others will follow suit creating a positive tipping point.

“Companies now see greater alignment between sustainability and profitability – it is not just about ticking corporate social responsibility boxes anymore,” says Niederberger. “Public relations and governance issues have also become more prominent, which elevates the importance of sustainability; and consumer behaviour, for example in the food sector and the choices consumers are making in food consumption, is driving a shift towards sustainability.”

As the business benefits become clearer, the pace of change will accelerate. “Companies are willing to bear the extra costs associated with establishing and operating an eco-factory, for example, if they can see the commercial gain,” says Carnell. “Likewise, as Asian companies recognise that it is not only necessary but profitable to recycle and reuse products they will develop the technology to do so; this is a region built on innovation and taking advantage of attractive market opportunities.”