CSR takes root in Asia

Institutional Investor special report, September 2008

The growing global interest in corporate social responsibility (CSR) is spreading to Asia. From airlines stripping the paint from their cargo jets to save fuel and emissions, to Korean academics starting shareholder activism groups, there are clear signs of increasing attention being paid to CSR at a corporate, investor and government level.

The newly paintless airline, for example, is Hong Kong’s Cathay Pacific, whose freighter fleet (not its passenger jets – airlines don’t give up their brands that easily) is around 200 kilograms lighter per aircraft as a consequence of the new policy, reducing fuel usage by around 600 tonnes per year and carbon dioxide emissions by over 1800 tonnes across Cathay’s freighter fleet. And it’s not just the paint. “They have published a position on climate change, which if you’re an airline is a huge issue,” says Richard Welford, chairman of CSR Asia, a consultancy, research and training group headquartered in Hong Kong. “They’ve been quite thoughtful and open about saying: these are the facts, this is the reality and this is what we are doing about it. It’s a great example of an Asian company tackling head-on one of its key issues.”

Environmental awareness like this is being coupled with a greater willingness to embrace social and community projects, and the considerable progress that has been made in promoting corporate governance in Asia in recent years. “The whole issue of CSR is morphing into ESG [environmental, social and governance],” says Jamie Allen, Secretary General of the Asian Corporate Governance Association. “That may just sound like an acronym change. But there is something more substantive underneath it. In the last 12 months we’ve noticed a much more close connection in discussions about how corporate governance is linked to CSR. You can’t have a sustainable environmental or social policy as a company if you don’t have a decent corporate governance foundation.”

One of the main drivers of awareness in both these areas is institutional investor pressure. “Pension funds are developing corporate governance and ESG policies which explicitly bring environmental and social issues into play,” says Allen. “More and more funds want to put money with external fund managers who are able to invest along those lines.”

This is, initially, a movement that has its roots outside Asia, but the trend has a big impact here too. “Some of the big listed companies in Asia, the western fund managers who are looking towards investing in them are saying: ‘show me what you’re doing,’” says Welford. “CSR is still dominated by the large multinationals, but we are now getting increasing interest from the more domestic companies.” One of his clients, an Asian company, has received so many queries from institutional investors in the last few months about CSR policies that it now intends to write a full report on the subject next year.

Allen adds: “It’s mostly been the globals – the UK, US and European pension funds  – but we are starting to see some of the Asian funds paying more attention to corporate governance. We’re not seeing quite as explicit a focus on CSR issues but that’s probably only a matter of time.” The Government Pension Fund in Thailand, for example, has a corporate governance policy, as does the National Pension Service in Korea. Additionally, it is revealing to note that the most recent annual conference of the UN Principles for Responsible Investment, a charter developed among many of the world’s most powerful institutional investors, was held in Seoul.

Several countries are showing particular interest in CSR: Welford highlights Malaysia, Indonesia, Singapore and China, some by regulation, others through a broader sense of encouragement. “In China you’ve got the ‘CSR is a commitment to a harmonious society’ type of line being taken by the government,” he says. In Malaysia, the Prime Minister’s office has been putting out encouraging comments about CSR, while the stock exchange, Bursa Malaysia, has been compelling listed companies to fill in questionnaires about their activities in CSR. In Indonesia, changes to the law now require resource companies to contribute some of their profits to CSR initiatives, although this change has not been wholeheartedly applauded; “I’m not convinced that really is CSR: it’s a compulsory tax,” says Welford. And in China, as well as the rhetorical encouragement, local stock exchanges have been issuing requests for companies to produce CSR reports.

That said, the experience of corporate governance reform does suggest that Asia will demonstrate an initial enthusiasm for CSR and then a slow-down. CLSA, the Hong Kong-based brokerage part-owned by the French banking group Credit Lyonnais (which was itself acquired by Credit Agricole in 2003), produces a detailed study of corporate governance in Asia by Amar Gill, its head of thematic research. In his most recent report, he noted: “There has been a palpable lessening of the pressure for reform around the region… many governments, regulators and market participants have taken their eye off the governance ball. Indeed, certain regulators are positively complacent about what they have achieved in the past decade, recounting with pride how much their stock markets have risen [Gill was writing before the current stock market blight took hold] and saying that all they need do now is to ‘refine their rules’ and ‘improve implementation’ of best practices. This implies a degree of regulatory perfection that does not yet exist in any Asian market.”

Allen, too, notes “a definite stalling”, but thinks that was partly to do with the bull market and expects some more attention to CSR and governance issues in today’s tougher environment. And he says that while broader corporate governance is experiencing some reform fatigue, interest in ESG remains potent.

There is certainly no shortage of research being produced around corporate governance and CSR in Asia today: the emergence of groups like CSR Asia, founded in 2002, are an illustration. The CLSA report goes into considerable detail in its ranking of Asian nations and companies for their behaviour; in the most recent report, Hong Kong took top place from Singapore in terms of national positions for corporate governance, while the highest-rated companies were HSBC, Japanese technology company Sharp, Hong Kong Exchanges, Taiwan Semiconductor, India’s IT leader Infosys, and Hong Kong’s utility CLP.

In another example, the Association for Sustainable and Responsible Investment in Asia (ASRIA) publishes an annual ranking of carbon emissions and disclosure, published on behalf of 315 investors with combined assets of $41 trillion who back the study. Its most recent survey found that more and more Asian companies were building strategic business initiatives to curtail carbon emissions; that Korean companies are the Asian leaders in having comprehensive carbon reporting; and that tech and telecom companies tend to have the more well thought-out strategies.”The underlying theme is that although climate change remains a relatively new policy area in Asia, leading companies are now taking the initiative and positioning themselves to capitalise on a shift in policy and growing consumer awareness,” says the report, which highlights the Korean steelmaker Posco, Singaporean property group Capitaland, the Taiwanese tech company Acer, and Hong Kong companies including Swire Pacific (which owns Cathay), CLP and Hang Seng Bank for their green programs.

Alongside all of this is a grass-roots movement towards shareholder activism, which in the west tends to be associated with more socially responsible policy, and certainly with better governance. An example of this is Sang-Jo Kim, the Professor of Economics at Korea’s Hansung University. He is the executive director of Solidarity for Economic Reform, a group active in minority shareholder activism, which in 2006 launched the Korea Corporate Governance Fund, which aims to invest in companies that are undervalued because of poor corporate governance, and then to help them improve that governance. “Our hope is to establish a new model for institutional investor activism in Korea, just as we have done for minority shareholder activism for the last 10 years,” he said at a recent summit.

SER has been, by Asia’s standards, a belligerent group, launching (successful) law suits against Samsung Electronics and LG Chemical, and bringing a shareholder proposal against SK Telecom which ultimately resulted in the resignation of SK’s chairmen.

Elements like these – the empowerment of the minority shareholder, the demands of international and local investors for CSR practices, the studying and research of corporate governance, the green plans of bigger corporations – all point towards a positive trend in Asia. It’s early days, but there are encouraging signs.