HONG KONG/SINGAPORE/TOKYO -- For Japan and its big banks, investing in coal-fired power plants has appeared to be a surefire way to profit from Southeast Asia's explosive economic growth. Along with the nation's development agencies, Japan's banks have pumped billions of dollars into coal plants across Asia in recent years, from Vietnam to Indonesia. Their investment logic was clear: Coal would give developing nations the plentiful, cheap power they needed to grow.
But there are signs that formula may be changing. In May, Mitsubishi UFJ Financial Group became the second major Japanese bank to announce that it would quit loaning money for coal-fired power plants. Its move followed Sumitomo Mitsui Trust Bank's decision, made in July 2018, to stop funding coal plants, citing environmental concerns. "We could not resist the big trend of preventing global warming," Tsukasa Kanai, Sumitomo's chief sustainability officer, said at the time.
The banks have been targeted by environmental groups such as Japan's Kiko Network for some time. But new pressure is coming from a surprising, and perhaps more persuasive, source: their own investors.
After lagging behind Europe and the U.S., large Asian investors are beginning to adopt "environmental, social and governance" investment principles that are aimed at changing corporate behavior on issues ranging from climate change to labor practices. MUFG acknowledges that the decision to reverse its coal policy was made, in part, because of "changes in the perspective of institutional investors."
To some, ESG may appear to be more of a social movement than an investment strategy. But ESG investing has been embraced by prominent, bottom-line-oriented global investors such as Blackstone Group, the TIAA pension fund and Japan's Government Pension Investment Fund. According to a survey by the Global Sustainable Investment Alliance, an industry group, investments based on ESG factors had reached $30.7 trillion by the start of 2018 -- a 34% increase in just two years.
George Iguchi, chief corporate governance officer of Nissay Asset Management, is among the ESG believers.
"ESG investment is an effective strategy for asset managers to pursue good returns in the long run," Iguchi said. "These three factors [environment, social and governance] are good indicators of what vision each company has for its business. Businesses with a good vision can generate better returns [that are] sustainable."
But ESG investing has its critics. Environmentalists and other activists say corporate responses to ESG pressure -- such as those taken by the Japanese banks -- often do not go far enough. On the other end of the spectrum, businesses and some government officials warn that such policies will inhibit growth in developing countries, particularly in Asia, that are in desperate need of investment.
"When we consider sustainable economic development in Southeast Asia, India, and other countries, low-priced coal energy is still necessary," says Ryuzo Yamamoto, a professor of Tokoha University says. "Current ESG investment focuses too much on the environment, and lacks consideration for economic growth in Asia."
There is a growing school of thought that good environmental strategy also makes financial sense, however. In a May 8 research report, analysts at Moody's noted that the declining cost of renewable energy poses a financial risk to older power sources -- including coal. Mic Kang, a Moody's vice president, said that "the declining costs of renewables and the development of disruptive technologies will increase the long-term risk of coal-fired generators becoming uneconomic to run."
Sacha Sadan, Director of Corporate Governance at Legal & General Investment Management, said sustainable investments should not put developing economies at a disadvantage.
"This is not a story about developed versus emerging markets, but about the resilience, decentralization and the digital innovation needed for economic growth and adaptation to climate change," he said. "We will not build the successful economies of the 21st century using a 19th-century technology."
Such long-term concerns were behind the decision by Japan's GPIF in 2017 to back ESG principles, marking a major turning point in Asian sustainable investing. With 150 trillion yen ($1.38 trillion) under management, GPIF's move helped make Japan -- where the Abe administration has made improving corporate governance a priority -- the fastest-growing market for ESG investing.
"We are a public pension reserve fund for the next several generations," Hiromichi Mizuno, GPIF's chief investment officer, told the Nikkei Asian Review. "In this sense, we are a cross-generational investor with a superlong [investment] horizon. As such an investor, we should focus on contributing to the sustainability of the whole capital market. We believe ESG represents a long-term strategy and is a relevant factor for long-term investors."
After GPIF's move, Japan's private asset managers began to follow. In March, Sumitomo Mitsui DS Asset Management began to expand its ESG analysis from domestic equities to Real Estate Investment Trusts in Japan and the Asia-Oceania region.
Yet activists say the actions taken by corporations in response to ESG investment pressure are only skin-deep.
"Japan's major banks have started to change their policies on coal power plants," said Kimiko Hirata, international director of the Kiko Network. "But it is discouraging that no Japanese bank has said it will stop financing ongoing coal projects, which are the focus of the problems of today."
Just a month before it made its coal pledge, MUFG and two other Japanese banks -- Sumitomo Mitsui Banking Corp. and Mizuho Bank -- announced a plan to finance the $2 billion Van Phong 1 coal plant in Vietnam. This triggered Kiko Network and 50 other NGOs worldwide to launch a campaign this spring against the Japanese banks' coal investments.
Despite the recent ESG policies set by Japanese banks, one Japanese operator of coal-fired power plants said that he foresaw no problems attracting corporate finance to fund domestic projects. Financial institutions do not require companies to specify whether the money will be used for coal projects, he added.
Still, he said he is concerned that coal companies may have trouble raising funds in the future. Another significant worry is the possibility that Western insurance companies could start pulling out of coal power projects -- making it difficult to build a plant.
Outside of Asia -- and particularly in Europe -- ESG investors are more aggressive, with some prominent funds going so far as to sell out of companies that do not comply with their environmental or social stances. KLP, a public pension fund in Norway with $80 billion under management, recently sold its stakes in 46 companies that fell short of their standards, which include not investing in companies in which coal-related businesses account for 5% or more of their sales. Among them were six Japanese companies -- five in the power sector and one trading house. Other European investors are following suit.
"Foreign NGOs in particular see Japan as a big problem, as their actions still very much lag international standards," Hirata said.
Sea slaves and human trafficking
Companies in other Asian nations are beginning to cite ESG factors for their corporate decision-making. Olam International, a major agricultural trading company in Singapore, is a case in point.
Olam has long been a target of environmentalists for allegedly clear-cutting rainforests in Gabon for rubber and palm oil production. But in January, the company announced that it would withdraw from four businesses -- including rubber and sugar -- that could have negative environment or social consequences. The switch was prompted, some say, by prodding from Temasek, Singapore's sovereign wealth fund and Olam's largest shareholder.
Sunny Verghese, Olam's chief executive, now sounds like an ESG evangelist. When he announced the company's strategic shift, he noted the environmental problems surrounding the rubber industry. "In terms of regions and places where rubber can be grown, it might involve planting rubber in deforested land," he said.
But while ESG concerns played a part in the strategy turn, Olam officials note that economic viability was another driving factor. The shift was motivated by trends like declining consumption of sugar, says the company, as well as lack of competitive advantage in some areas. The divestments will take place over the next six years and are expected to free up around $1.6 billion to be plowed into other segments, including edible nuts, cocoa, cotton and spices.
"There is a link between sustainability and long-term value," Verghese said in May. "When [investors] feel the ESG risk is high, the cost of capital, risk of capital, is also higher."
Another Asian conglomerate, Hong Kong-based Swire group, has also started to talk up its ESG credentials. The company's website touts its "green investments" along with other businesses such as its mining holdings, and it is promoting social policies that it claims will promote the role of women in the workplace. "Sustainability is not just about the environment," said Olivia Wong, Swire's head of diversity and inclusion development, at an ESG seminar in May.
In Thailand, a global fishery powerhouse, NGOs have targeted the industry's use of "sea slaves" who have been forcibly put to work on ships. The term, coined by a British environmental and human rights organization, suggests that many fishery workers are migrant laborers trafficked by agents in Bangkok. In response to such criticism, Thai Union Group, one of the largest producers of seafood-based products in Thailand, has established a system to monitor conditions and report them to shareholders.
ANA Holdings, the Japanese airline, has also made moves against trafficking. Its "Human Rights Report," published last year, analyzes with surprising frankness the human-rights-related business risks it faces. "The ANA Group operates airlines connecting cities all over the world, and we understand the risk that our business may unwittingly become involved in human trafficking. According to the [International Labor Organization] report from 2014, human trafficking earns profits of roughly $150 billion for traffickers," acknowledges the report.
ANA now trains its flight attendants in how to spot suspected trafficking activity, and instructs them to call to immigration authorities if they perceive suspicious activity on a plane.
In another significant move, the Singapore Exchange called for listed companies to submit sustainability reports in 2017. Loh Boon Chye, chief executive officer of SGX, said, the step was an effort "to meet the growing interest in sustainability from shareholders and potential investors worldwide." The Hong Kong exchange followed suit this May with a proposal to ask listed companies to disclose sustainability information. Under the proposal, companies' boards would be required to share their ESG policies, including on protecting the environment, promoting women in the workforce and improving labor conditions.
But does it pay?
For investors, the most important question is whether the ESG philosophy makes sense as an investment strategy.
The ESG idea was not dreamed up by stockpickers, but by an effort in 2006 led by then-United Nations Secretary General Kofi Annan to create global standards for responsible investing. The idea gained currency after the financial crisis of 2007-08 sparked a broader discussion about how to balance long-term business growth and short-term profit pressures. Today, the UN's Principles for Responsible Investment has over 2,400 signatories -- including asset owners and investment managers, with over $85 trillion of total assets under management.
This year, the notion that ESG investing was compatible with making money was given a boost by Laurence Fink, chairman and CEO of BlackRock, the world's biggest asset manager with around $6 trillion under management. In his annual letter to CEOs, Fink said the millennial generation is emerging as an investment force -- and that this will give ESG investing momentum. He noted that 63% more millennial workers surveyed by Deloitte said the primary purpose of business should be "improving society" than "generating profit."
"In the years to come, the sentiments of these generations will drive not only their decisions as employees but also as investors, with the world undergoing the largest transfer of wealth in history: $24 trillion from baby boomers to millennials," Fink wrote. "As wealth shifts and investing preferences change, environmental, social and governance issues will be increasingly material to corporate valuations."
According to some measures, ESG investing has outperformed over the last decade. Two ESG funds -- the Vanguard FTSE Social Index Fund and the Putnam Sustainable Leaders Fund -- have slightly outpaced the broader S&P 500 index.
Such performance makes sense to Mizuno of GPIF, which encourages the financial institutions that manage the Japanese pension fund's assets to adapt ESG perspectives. He rejects the idea that ESG investing should mean lower profits -- and the idea that developing nations need polluting industries to reach their potential.
"ESG investors should support emerging countries to build more sustainable infrastructure [such as alternative energy]," he said. "We believe that ESG is even more relevant there."
Nikkei staff writers Akane Okutsu and Eri Sugiura in Tokyo contributed to this report.