Asia will power the next stage of environmental, social and governance (ESG) uptake in 2018 as China is poised to join Japan in accelerating disclosure and engagement. China’s pollution battle will keep the heat on fighting carbon emissions globally, even as the U.S. disengages.

1. Global ESG 2018 Outlook
Gregory Elders, Shaheen Contractor
Bloomberg Intelligence analysts

2. Asia will power the next stage of environmental, social and
governance (ESG) uptake in 2018 as China is poised to join Japan
in accelerating disclosure and engagement. China’s pollution
battle will keep the heat on fighting carbon emissions globally,
even as the U.S. disengages.
Investor focus on gender diversity will receive a big boost in 2018,
when U.K. companies will have to disclose pay-gap data. Greater
investor demand and better corporate data disclosure will fuel
continued ESG asset increases.

3. Tilting to ESG shows performance and promise where leaders lag

4. Using environmental, social and governance (ESG) performance
as an added factor, rather than primary criterion, offers a path
to added information for investors and helped produce better
performance this year. Fossil-free indexes, for example, have
outperformed as energy shares have trailed the market.

5. Outperformance this year tilting towards ESG in the MSCI USA
ESG Select, vs. underperformance in the single-factor MSCI ESG
USA Leaders index, shows the potential advantage in using ESG
as an added factor rather than a sole investment criterion. The
Select index overweights ESG leaders and underweights laggards,
and optimizes for other factors such as risk and return. It has
outperformed its non-ESG variant by around 120 bps in 2017, while
the MSCI USA and World Leaders variants have trailed by about
150 bps.

7. Asia’s ESG surge will see Japan awakening gain China boost

8. Japan’s giant $1.3 trillion Government Pension Investment Fund (GPIF)
will continue to be a key force in driving ESG uptake globally. China’s
deepening pollution fight, alongside the Hong Kong Exchange’s
ratchet up in environmental disclosure rules, will fuel added focus on
ESG risks and engagement across Asia.

9. GPIF sustainable funds shift good for investors and companies

10. Japan’s Government Pension Investment Fund expects its 1 trillion yen
investment, 3% of its Japanese equity portfolio, into environmental,
social and governance (ESG) indexes will boost both its own risk-
adjusted returns and those of corporate Japan.
The move is part of GPIF’s multi-pronged ESG efforts that include last
year’s signing onto the U.S. and U.K. 30% clubs targeting improved
gender diversity and its chief investment officer joining the board of
the Principles of Responsible Investment.

11. Disclosure trend a tale of one city

12. Hong Kong-listed Chinese companies will continue to improve their
ESG data transparency more rapidly than mainland peers, as they’re
driven by the Hong Kong Exchange’s ESG reporting guidelines and
from more international investor exposure. Shanghai Shenzhen
CSI 300 companies on median have seen no improvement in their
Bloomberg ESG disclosure score over the past five years; however,
members also listed on the Hang Seng Composite Index exhibit
better and improving disclosure, even when controlling for market
cap.
Hong Kong Exchange rules this year required companies to report
on ESG issues, and in 2018 specifically on environmental metrics, on a
comply-or-explain basis.

14. Carbon fees to fossil-fuel-ban goals stoke climate slow simmer

15. From China to Canada, more countries are going to charge for carbon
in 2018, slowly increasing long-term pressure on high-emitters and
fossil-fuel producers. Indicating a potentially more stringent shift,
several European countries have declared goals for outright bans on
coal power and petroleum-fueled vehicles.

16. Technology, climate goals bring forward coal, oil demand peak

17. Alternative-energy technology and country-pledged carbon goals
could wipe out forecasts for growth in coal and oil demand and trim
natural gas expansion. If countries follow through on Paris climate
agreement goals, which is a big “if,” coal demand would peak by
2020 and oil by 2030, according to OPEC forecasts. A decrease in
global coal use since 2014, led by China and the U.S., may point to the
risk of a faster energy and emissions transition.

19. Women work more for less, even as directors, missing top posts

20. Female directors tend to earn less money, yet sit on more committees,
indicating a pay gap even at the pinnacle of companies. All directors
at a company usually earn a flat fee, but board and committee chairs
(mostly men) earn more. The median female director (excluding
chairs) earns less than 50% of male counterparts at Flughafen Zurich,
Groupe Bruxelles Lambert, Bolsas y Mercados Espanoles and Pargesa
Holding, based on Bloomberg-compiled data, the biggest gap
among S&P 500, Stoxx 600, ASX 200 and FTSE 100 firms.

21. U.S. cedes gender diversity leadership to more avid countries

22. The U.S. has flipped from a relative boardroom gender leader to
a laggard in five years as other countries have successfully turned
to legislation and threats to boost diversity. While many European
countries have adopted quotas, something not likely to fly in the
U.S., Australia has demanded simple corporate transparency and
disclosure. The Stoxx Europe 600 has nearly tripled to a median 30%
female directors since 2010, the Australia ASX 200 has climbed to
25%, and the S&P 500 has limped to 21%.

24. Sustainable investing talk turns to more action as assets flow

25. Investor talk about ESG is more rapidly turning into action as assets
flow into sustainability focused funds. Large, institutional pension and
insurance asset owners, alongside retail demand from millennials, are
driving asset managers to boost systematic ESG focus and funds.

26. Surge of demand optimism lifts ESG assets in rising tide

27. ESG assets and funds have accelerated since 2015, pointing to a
growing demand for such strategies. Asset growth has picked up
pace, with increases in 1H surpassing full-year 2016 levels. Similarly,
the number of funds created doubled in 2016 vs. 2013, with 2017 set
to beat last year’s peak. Although assets have grown to over $360
billion, ESG is still limited to a niche market, with U.S. ESG ETFs having
the least amount of assets of the 11 Bloomberg-defined smart beta
categories.

29. Green-bond issuance keeps hitting records

30. Sales of green bonds from corporates and Fannie Mae helped
power a sixth-straight record amount of quarterly issuance for the
instruments in 3Q, while 4Q volume is running near the pace for
a seventh. Almost $140 billion of green bonds have been issued
this year vs. about $100 billion for all of 2016. Companies, led by
utilities and increasingly transport-related businesses, are issuing
green bonds to fund clean-energy transitions.

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