Comment: ESG and PE in Asia: rules of attraction

ESG in Asia has historically followed behind Europe's embrace of this sector, but despite the hesitancy of some in the region, investment companies and private equity firms with the vision to invest in ESG in Asia have obtained strong financial results. At the same time, large scale ESG regulatory reforms in many countries in Asia in recent years have focused on attracting ESG investment. Together they are putting ESG firmly on the map in Asia.

The role of regulation

Recent years have seen impressive regulatory reform across many countries in Asia in the ESG sphere. While some of these reforms have focused on combating greenwashing – for instance, the Monetary Authority of Singapore (MAS) is expected to announce new and stronger ESG disclosure standards for listed companies this year - regulators have largely focussed on attracting ESG investment.

For instance, the Chinese government announced in 2021 that it would invest 1.5bn yuan (approx. $230m) to establish the Kunming Biodiversity Fund, which aims to support developing countries' initiatives to protect biodiversity. In Singapore, MAS announced in 2019 that it had set up a $2bn green investments program, placing funds with asset managers who are committed to driving regional green efforts with Singapore as a base, amongst other applications.

Asia's financial hubs are not alone in this trend: Goldman Sachs states that APAC ESG policies have doubled in the last 5 years, now contributing 20% of global ESG policy.

Regulators in Asia have also been shifting away from a purely incentive-based strategy to an approach which penalises companies for not adopting ESG initiatives. In 2020, MAS released a set of ESG guidelines for the asset management, banking and insurance sectors, requiring relevant institutions to comply with the recommendations set out, or have such non-compliance taken into account by MAS in its overall risk assessment of such institutions.

Similarly, listed companies in Hong Kong have been required to release annual ESG reports since 2020. Goldman Sachs expects policies mandating ESG fund requirements to accelerate in Asia, as the risk of greenwashing rises and demand for more product-level transparency increases. One area to watch closely is the development of regional or even global green taxonomies, which refers to a classification system for environmentally friendly activities that can be used for disclosures by listed companies or for sustainable financing purposes. It seems clear that the majority of Asian regulators are encouraging companies to incorporate ESG more broadly – which bodes well for the future of investments in this sector in Asia.

ESG investing continues to offer a strong value proposition for savvy investors who are able to look beyond short-term financial metrics to focus on the longer-term potential of a business. Being able to identify such opportunities has also become increasingly vital as the green premium widens. According to Goldman Sachs, APAC companies with ESG policies and practices closely aligned to the leading green taxonomy standards of the EU now trade at premiums of more than 50% compared to similar companies in the same sector that are not as closely aligned.

There has also been recent focus on harmonising ESG standards across jurisdictions; the International Sustainability Standards Board was established with a goal of developing comprehensive global sustainability reporting standards this year, and enjoys support from 38 jurisdictions comprising approximately 70% of the world's GDP. Such harmonisation should benefit the ESG sector in Asia broadly, by reducing the reporting cost burden on both firms and investors.

TES – a tale of visionaries

In February 2022, Navis Capital Partners, an Asia-based private equity fund, sold its interest in the TES-Envirocorp group to the eco-engineering division of the SK Group conglomerate. The deal valued TES at an enterprise value of $1bn, almost a four-fold increase from 2013, when Navis was reported to have acquired its stake at an enterprise valuation of approximately $175-250m. TES's rise illustrates the financial rewards that can be reaped by investors who have the vision to commit to a company whose foundation rests on ESG factors, and the drive to work with that company to help it succeed. TES was incorporated in 2005, by some accounts before the "ESG" term was coined, and Navis acquired its stake in 2013 when ESG-focussed investing was still in its infancy; fast forward to 2022, and TES is now a global leader in sustainable technology solutions with operations in 43 facilities across 21 countries.

Navis and TES's success is just one of many in Asia. Actis, a global investment firm focused on private equity, energy and sustainable infrastructure, announced in April 2022 that it had agreed to sell one of its portfolio companies, Sprng Energy, to Shell for $1.55bn. Sprng Energy is one of India's largest renewable energy companies which supplies solar and wind power to many electricity distribution companies in India, and was established by Actis only in 2017. In the same month, an investor consortium led by BlackRock invested more than $500m in Tata Power's renewable energy division. It is clear that ESG considerations are important for private equity investing – not only do investors increasingly require that their funds are used for ESG purposes, investing in the ESG sector continues to have the potential to yield out-sized returns for astute funds and, by extension, their limited partners.

This is not to say that ESG investing is without its downsides, as its sceptics have been at pains to emphasise – but we hope that the above goes some way towards showing that ESG is neither overhyped nor oversold.