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Asia Inc. can take lessons from the West in thinking beyond profit

Hindustan Unilever tops Asian peers in ESG performance

Environmental responsibility is a key part of ESG investing. Asian companies must look beyond profitability and must pursue socially responsible behavior to continue drawing investors and achieve sustainable growth.

TOKYO -- Asian corporations still have much catching up to do to match their U.S. and European counterparts in achieving profit while maintaining socially and environmentally responsible corporate behavior, Nikkei has found.

When ranking large companies in terms of return on equity and environmental, social and governance [ESG] scores, only eight corporations in the Asia-Pacific region made the top 50. Among the top 100 so-called ROESG scores, 80% hailed from the West.

This presents a problem for corporate Asia in an age where investors, clients and top recruits are growing more aware of sustainability. "Companies that don't strike healthy balance between ESG and ROE will be cut off from the global investment standard," said Mana Nakazora, chief credit analyst at BNP Paribas.

For this study, Nikkei looked at 263 companies whose market capitalizations are at or above $30 billion, and whose capital ratio is at least 20%. Coming out on top is Danish drugmaker Novo Nordisk with a ROESG score of 92.4. The score is derived by multiplying the ROE percentage number (79) with the ESG score of 1.17.

Novo Nordisk's ESG score ranks in the top 30. Its plants rely on renewable energy for 77% for its power supply. The company also grants free insulin to children living in developing countries. Novo Nordisk has focused on the "triple bottom line" -- incorporating social impact and environmental responsibility along with financial performance -- since the 1990s.

The top Asian country under the ROESG metric is Hindustan Unilever, whose score of 67 places it in third place. The Mumbai-based producer of home care products generates an ROE of 73.7% and an ESG score of 0.91. A company representative said responsible growth is the only model that can answer consumer expectations and adapt to changes in market trends.

Australian biotechnology company CSL also made the cut at 19th. Indian internet technology powerhouse Tata Consultancy Services came in 20th place.

Financial markets are pushing companies to strike a balance between profitability and ESG performance. While the concept of corporate social responsibility, or CSR, encourages companies to return part of profits back to society, ESG is aimed at boosting corporate value by promoting environmentally and socially responsible behavior as well as by improving corporate governance.

In 2006 the United Nations started urging institutional investors to adopt principles for responsible investments. Global ESG investments have now grown to $30.7 trillion at the beginning of 2018.

Japan's Government Pension Investment Fund, the world's biggest pension fund, decided to back ESG principles in 2017. It announced this year that it started investing in ESG-focused green bonds and social bonds.

"We absolutely see that ESG [is starting] to take a larger role" even in Asia, said Martina Cheung, president of S&P Global Market Intelligence, which provides research and data for banks and investors.

"As investors and private equity become more used to using ESG data, they are going to increasingly want to know how to convert material nonfinancial operational factors [such as ESG] into their financial model," Cheung added.

Kazuyuki Mitsuhashi, a senior deputy general manager at Mitsubishi UFJ Trust and Banking, points to ESG's crucial role in investment.

"As earnings expansion slows across the world, judging companies with growth alone is difficult, and sustainability become important" said Mitsuhashi. "ESG is a crucial component in earning social recognition, and for the long-term, it will be reflected in finances, leading to higher corporate value."

For this study, Nikkei used ESG scores published by Arabesque, Sustainalytics, FTSE, MSCI and Robeco as of the end of March this year. The scores are converted into a grading system that grants a maximum of 1.3 points to a company. The ROE assigned to each company is the average over three fiscal years using data from QUICK FactSet.

Nakazora, of BNP Paribas, said that the ESG scores may be affected by how much experience a company possesses in answering sustainability surveys. "I am interested to see whether [ROESG scores] develop into indicators useful as universal ratings," she said.

Nikkei staff writer Akane Okutsu in Tokyo contributed to this story.

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