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Asia's allure for global investors in 2021 tempered by ESG risks

Region's opportunities go hand in hand with environmental and human rights challenges

Lunar New Year decorations at Gardens by the Bay in Singapore: Asian countries are forecast to lead the global economic recovery in 2021.   © Reuters

TOKYO/SINGAPORE/HANOI -- On the outskirts of Ho Chi Minh City, work is underway on what Vietnamese Prime Minister Nguyen Xuan Phuc has called one of the biggest infrastructure projects in the nation.

On paper, Long Thanh International Airport is a sleek, modern hub anticipated to have capacity for 25 million passengers annually in 2025 and, by 2040, 100 million -- roughly the same as Vietnam's current population and huge even by Southeast Asian standards. It will ease the pressure on the city's crowded, delay-prone Tan Son Nhat International Airport, which is itself set for an expansion.

The project shows Vietnam's ambitions as an emerging economy. These aspirations rise even higher in a proposed goal of gaining developed nation status by 2045.

But the country also provides an example of a risk that investors will find as they wade into Asia: whether the region's opportunities can measure up to Western money managers' increasing emphasis on environmental, social and governance factors.

The energy-hungry nation's Vung Ang 2 coal-fired power project has drawn heavy scrutiny. Environmental groups have called on shareholders of one participant, Japanese trading house Mitsubishi Corp., to either pressure the company to withdraw from the project or dump their shares.

No matter how hard Asian companies try to downplay such investments in smokestack industries, they are bound to taken up as rallying cries by climate activists, which use social media to drive public opinion. Investor money reacts quickly to such pressure.

CEO Larry Fink of BlackRock, the world's largest asset manager, told an Institute of International Finance conference last week that if companies do not move toward more sustainable strategies, "you're just going to see less equity demand for your shares."

Activists protest against the Vung Ang 2 power plant in front of a shareholders' meeting of a mega bank in June 2020 in Tokyo.

Infrastructure is one of the biggest draws for global investors scouring Asia for prospects.

When KKR announced the close last month of a $3.9 billion Asia-Pacific infrastructure fund, days before the closing of a $1.7 billion real estate fund there, the New York-based private equity firm touted the region's "continued emergence as an economic engine for the 21st century."

The region's infrastructure needs are driven by its fast economic growth. The International Monetary Fund expects emerging Asian economies to rebound strongly in 2021 with an 8.3% expansion, faster than the 5.1% growth rate predicted for the U.S. and 4.2% in the eurozone.

This forecast relies not only on China, which has largely contained the coronavirus and is project to log 8.1% growth next year. The rest of Asia looks strong as well, particularly India, which is projected to expand 11.5%.

The region "should see growth as a manufacturing hub that supports global supply chains," particularly in high-tech fields, said Manabu Tamaru of Barings Japan.

Asian companies are proving resilient to the current crisis. The stock market's consensus view is that forward earnings per share among the companies in MSCI's Asia ex-Japan index will continue growing by double digits in 2021. The share of analysts with a "buy" recommendation for the region has risen to around 70% from 60% a year ago.

India's benchmark BSE Sensex index broke 50,000 for the first time in January, and South Korea's Kospi and Nikkei's China-Related Stock 50 index are both in record-high territory.

This is not the first time investors have taken notice of Asia's growth potential. The question now is whether the region can recover in a sustainable way, and whether it can meet environmental, social and governance demands while doing so. The situation often boils down to a face-off between the West's money and Asia's problems.

Emissions from a power plant chimney rise over Ulaanbaatar, Mongolia. Asia's greenhouse gas emissions are expected to rise as its economic engines roar back to life.   © Reuters

On the environment, the region's greenhouse gas emissions are bound to rise as its economic engines roar back to life. The economic stagnation caused by the global pandemic has reportedly reduced carbon emissions by 2.4 billion tons worldwide. This exceeds the estimated 500 million-ton drop-off during the aftermath of the global financial crisis, as well as the 1 billion-ton decline at the end of World War II.

Investors will play a crucial role in steering the post-COVID global economy toward decarbonization, said former Bank of England Gov. Mark Carney.

The two economic powers of China and India are also two major emitters of carbon dioxide. The Climate Action 100+, a global collective of 545 institutional investors that oversee around $52trillion in assets, has pushed PetroChina and India's state-owned power utility NTPC toward decarbonization. PetroChina said last August that it would expand investments in clean energy and attain virtually no greenhouse gas emissions by 2050. NTPC, formerly known as India's National Thermal Power Corp., started issuing data last year under the Task Force on Climate-Related Financial Disclosures framework.

While decarbonization exemplifies the "E" part of ESG, the "S" has come into focus in human rights and working conditions.

This includes China's crackdown on pro-democracy activism in Hong Kong and alleged human rights abuses against the country's Uighur minority. In Myanmar, Japanese brewer Kirin Holdings' decision to end military-linked joint ventures after the recent coup underscores the need for awareness of human rights issues in Southeast Asia.

Malaysia's Top Glove, the world's largest producer of medical gloves, enjoyed rising share prices last year as demand surged amid the pandemic. But after thousands of workers at the company's production facilities contracted the coronavirus, U.S. asset manager BlackRock voted against the board's slate of director candidates at a shareholder meeting last month, citing inadequate safety measures for employees.

Though the proposals ultimately passed, Top Glove later issued statements pledging to improve working conditions and assuring stakeholders that it is doing its "utmost to ensure the continued safety and well-being of our employees, and to mitigate the spread of COVID-19."

Thailand has been the target of frequent criticism for abuses of workers on vessels in its massive fishing industry, in what some investors have called "slavery at sea."

Thai Union Group, the country's largest producer of canned tuna, has on several occasions come under pressure from shareholders and others to explain its treatment of its workers. When a major coronavirus outbreak was confirmed last month at one of its processing plants, the company promptly began PCR testing of employees, in what could well be a lesson learned from Top Glove's troubles.

Thailand has faced international criticism over what has been called "slavery" in its fishing industry.   © Reuters

Indonesia faced international criticism for the environmental damage caused by its oil palm plantations, and for child labor and worker exploitation in the palm oil industry -- a commodity for which the country produces half the world's supply.

The Rainforest Action Network has put pressure on global financial institutions to stop doing business with palm oil producers such as Indofood, in part by urging shareholders to vote against appointments of top officials and to push for environmental experts to be named as outside directors.

Governance remains a challenge for the region as a whole, including the mature economies of South Korea and Japan. Many companies are still heavily swayed by founding families that build close ties with the government or military while using complex networks of shareholdings to maintain control even when they have only small stakes on paper.

Opaque governance had not been a prominent issue during the period of rapid growth. But with Asian economies facing a slowdown to cruising speeds, the lack of transparency stands to become a major roadblock against the inflow of long-term investment.

In South Korea, Lee Jae-yong, the vice chairman and de facto chief of Samsung Electronics, said during a press conference last May that he will not bequeath management of the conglomerate to his children. In other words, Samsung's scion declared an end to the group's generational inheritance of control, a dubious governance staple among South Korea's collection of family-owned chaebol.

South Korea's tech-heavy stock market has rallied during the pandemic, along with the Nasdaq Composite index in the U.S. This suggests that investors anticipate a transformation in Asia's business community.

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