In China, Hong Kong, India, Malaysia, Singapore and South Korea there are compelling national interest reasons for policy makers to promote the incorporation of environmental, social and governance factors into investment practice.

Issues include addressing air quality, improving citizens’ long-term health, reducing inequality, providing for an ageing population and attracting the international capital necessary to meet economic growth targets.

Investing prudently requires ESG factors to be considered in investment decision-making and to be part of the dialogue between investors and companies. This is consistent with the legal framework in all the markets studied in this report.

However, despite growing awareness of responsible investment, many investors have yet to fully integrate ESG factors into their investment decision-making processes. Public policy and regulation are a key influence. Currently, these markets have few formal requirements to integrate ESG factors, but investor obligations and duties are dynamic concepts that continuously evolve as society changes.

By working together, policy makers and investors can shape investment frameworks to clarify the obligations and duties investors owe to beneficiaries – obligations to embed ESG factors into investment decision-making, ownership practices, and ultimately, the way in which companies are managed.

This report aims to bridge the needs of policy makers and investors in order to support the integration of ESG factors in investment markets. Policy makers, investors and stakeholders interviewed for this report identified the following barriers to ESG integration: diverging views on how to define ESG issues; a perception that integrating ESG factors will compromise investment performance; difficulty in engaging companies on ESG factors given the structure of the corporate sector, e.g. many large companies being family-run; few regulatory mechanisms requiring investors to integrate ESG factors or report on sustainability issues; and low-quality ESG disclosure by companies.

Based on a review in each country of investment practice, current regulation and over 50 interviews with policy makers, investors and stakeholders, this report makes recommendations for investors and policy makers.

To deliver prudent returns over the long-term, investors should:

  • build their knowledge of the investment case for integrating ESG factors to drive long-term value creation, including developing an evidence base to demonstrate how ESG factors affect the financial performance of companies;
  • encourage ESG disclosure and high standards of ESG performance in the companies or other entities in which they are invested;
  • select, appoint and monitor investment managers and service providers (such as brokers, investment consultants and data providers) based on the quality of ESG integration in business models;
  • publicly commit to responsible investment in order to provide policy makers with the confidence to act.

To build investment markets that contribute to long-term development, policy makers could consider:

  • clarifying that ESG factors are an explicit part of investor obligations and duties;
  • introducing stewardship codes and corporate governance codes, and monitoring outcomes, with requirements for investors to actively engage with the companies in which they are invested, including on ESG factors, and to report on this engagement;
  • requiring investors to disclose the processes they have in place to integrate ESG factors and monitor how such process affect the financial and sustainability performance of companies;
  • strengthening requirements by companies to disclose consistent, comparable and reliable reporting of ESG factors as part of annual reporting;
  • leading by example through the actions of sovereign wealth, provincial wealth, state and national funds to develop national champions for ESG integration.

The integration of ESG factors in these markets is at an early stage. The global importance of Asia’s markets means the pace of change matters to investors the world over.

Produced in collaboration with UNEP FI and Generation Foundation

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Investor obligations and duties in six Asian markets