ESG with Asian characteristics

ESG has developed rapidly over the past few years and is now taking a serious hold in Asia. For example, the Hong Kong Stock Exchange’s ruling on “comply or explain” for ESG information comes into force on 1 July 2020 and China is widely expected to introduce mandatory disclosure this year. We have seen asset owners require ESG, the public is increasingly demanding it, and more businesses are incorporating sustainability into their long-term strategies.

The International Organization of Securities Commissions (IOSCO), which regulates 95% of global securities markets, has “set out the importance for issuers” to disclose ESG information. In Asia, 13 of the 14 main exchanges are now members of the Sustainable Stock Exchange Initiative, which means they commit “to promoting long-term sustainable investment and improved environmental, social and corporate governance disclosure and performance among companies listed on” their exchanges.

Considering ESG issues is important for Asia because they affect risks and opportunities for companies as economies develop. However, there are several reasons why it is not easy to aggregate ESG information in Asia or examine ESG collectively for the region. These include the diversity of the region in terms of economic and social development, the different languages spoken (and hence reporting and disclosure in local languages), as well as a wide range of regulatory and disclosure regimes.

Growth often means a focus on economics and poverty alleviation, sometimes to the detriment of the local environment. And, the rapid development of all things – from financial markets to industries and services – means that some segments of society are left behind or become vulnerable, which highlights the importance of looking at social issues. Corporate governance issues also need to be viewed in a cultural context, for example, government ownership or where some issues have traditionally remained unchallenged in more hierarchical societies.

We do not believe that there is a single uniform approach to sustainability and ESG in Asia – what works in one country may not work in another. Local investors, businesses, and regulators are learning to navigate sustainability issues in this diverse region. At the same time, international investors should appreciate the local context and not expect the same standards to be applied everywhere.

As understanding of various ESG issues can affect and influence perception, reputation, and profitability, there will be risks and opportunities for companies of all sizes. We think it is important to consider the ‘momentum of sustainability’ or the ‘change over time’, especially for local businesses. International companies also have an opportunity to bring their experience to local markets.

For investors, we think it is important to distinguish between information – which helps us understand ESG issues, and data – which we can use to measure things in the context of that information. We advocate the ‘ESG integration’ approach over ‘scoring or rating’ because we think it can offer a deeper analysis and understanding of how ESG issues affect the future course of a company, rather than a picture of where it is now. The relative paucity of ESG information and data in Asia lends itself to integrated analysis and engagement. There has never been a better time to consider the sustainability of businesses – as we launch a series of reports looking at key questions to ask in Asia, the time to integrate is now.

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The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Wai-Shin Chan, CFA,

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Equities: Stock ratings and basis for financial analysis

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Prior to this date, HSBC’s rating structure was applied on the following basis:

For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate, regional market established by our strategy team. The target price for a stock represented the value the analyst expected the stock to reach over our performance horizon. The performance horizon was 12 months. For a stock to be classified as Overweight, the potential return, which equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated, had to exceed the required return by at least 5 percentage points over the succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock was expected to underperform its required return by at least 5 percentage points over the succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands were classified as Neutral.

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Buy 55 per cent ( 31 per cent of these provided with Investment Banking Services )

Hold 37 per cent ( 31 per cent of these provided with Investment Banking Services )

Sell 8 per cent ( 23 per cent of these provided with Investment Banking Services )

For the purposes of the distribution above the following mapping structure is used during the transition from the previous to current rating models: under our previous model, Overweight = Buy, Neutral = Hold and Underweight = Sell; under our current model Buy = Buy, Hold = Hold and Reduce = Sell. For rating definitions under both models, please see “Stock ratings and basis for financial analysis” above.

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Additional disclosures

1. This report is dated as at 01 June 2020.
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