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Sustainability implementation pace slows in Asia
Funds, GPs find tech innovation push puts downward pressure on ESG integration
Tom King 14 Nov 2023

In Asia, environmental, social and governance (ESG) resources have increased while work on sustainability policies and implementation has slowed, according to a recent report.

Forty-three percent of respondents to the report published by global law firm Morrison Foerster and private equity research platform AVCJ have both an ESG committee and an ESG specialist, up from 8% in last year’s report, but 90% of respondents have made no recent changes to their ESG policies or work on implementation of those policies.

The report surveyed 100 Asia-headquartered fund general partners (GPs) each with assets under management of at least US$1 billion to gain their insights on how sustainability (including economic, environmental and social sustainability) considerations are impacting their investments and the market.

The respondents included private equity funds, credit and special situations funds, sovereign wealth funds, insurance asset managers and pension funds. By geography, 35% of respondents were based in China/Hong Kong, 25% in Japan, 15% in India, 15% in Southeast Asia and 10% in other Asian jurisdictions, including Taiwan and South Korea.

Sustainability, the report notes, is a consideration at each stage of the investment process, with 84% of respondents conducting non-compliance-related ESG due diligence on most or all deals they consider, but only 23% of respondents having pulled out of an investment process after uncovering adverse ESG issues during diligence.

GPs recognize, the report shares, the potential for sustainability performance to drive value and return, with 91% of respondents having invested in a company with negative or neutral ESG credentials, expecting to increase its valuation by improving these metrics, and 84% of respondents believing positive ESG metrics will increase the valuation of a target.

Responsible tech is a key theme for investment and sustainability in 2023, as 80% of respondents say they have adopted or made it a requirement to adopt responsible tech at portfolio companies, while a full 20% either do not take this action or are unfamiliar with the concept.

However, this push for innovation in a competitive global marketplace puts downward pressure on ESG integration as 50% of respondents mention that there are competing priorities for tech innovation over responsibility and social considerations at their firm.

Sustainability work, the report indicates, goes well beyond climate-related issues, with many GPs working particularly hard to make progress on diversity, equity and inclusion (DEI), and 73% of respondents having identified clear and measurable goals on DEI, and 58% having conducted internal training on DEI for management and staff or communicated the importance of DEI internally and externally.

As well, greenwashing risks have spurred meaningful action across operations, portfolio companies and supply chains, with 70% of report respondents having policies regarding ESG communications or green claims by portfolio companies, up from 54% a year ago.

GPs face significant regulatory and operational challenges as 53% of respondents cite the need to keep pace with rapidly evolving regulatory regimes as the most significant challenge, but the lack of transparency and reliability of ESG data comes second at 43%.

“The results of this year’s survey show that funds and GPs in Asia continue to see tangible benefits from evaluating risk through the ESG lens,” says Susan MacCormac, co-chair of Morrison Foerster’s global ESG group. “I have worked with companies and funds that have been doing this for well over two decades now. And the reason they remain committed to integrating ESG and sustainability considerations is that the programmes we design allow them to see around corners, including preparing for emerging risks like cybersecurity and capturing opportunities like responsible tech.”

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