Sustainable investing strategies have ascended quickly in the last 10 years. The events of this year have been first and foremost a human tragedy, but they also have served as a catalyst to awakening interest and adoption of these strategies as reasonable approaches to remain resilient during these uncertain times. Indeed, in early 2020, J.P. Morgan Global Equity Research estimated that the sustainable investing market is expected to reach $45 trillion in assets under management (AUM) by the end of the year.
The adoption of sustainable investing strategies by investors is also influencing their engagement with investee companies, and subsequently also influencing the engagement of companies with their suppliers. In Taiwan, where I live and work, a large percentage of companies occupy an important position in the global economy as major suppliers of goods across the industrial spectrum. Chances are, when the average consumer buys products from global brands such as Apple, Nike or Huawei Technologies, they are also indirectly buying Taiwanese products used as a component or key material in the production process.
I participated in a recent industry summit organized by Cathay Financial Holdings, where senior executives met with high-level government officials and scholars to discuss the latest trends. Cathay Financial is one of the largest financial groups in Taiwan and Asia; and for the last four years it has been hosting one of the most influential summits on sustainable finance in the region. At the summit’s first edition, former U.S. Vice President Al Gore was the keynote speaker.
In times when many events are forced to go virtual or to restrict the number of attendees, it feels a bit surreal to participate in person at a summit. Taiwan, which has implemented－as Bloomberg describes－one of the most effective pandemic responses in the world, managed to spend more than 250 days (April 12-December 22) without a single locally transmitted coronavirus infection. Despite maintaining successful efforts to contain it, neither the government nor the private sector is taking any chances of exposure as strong control measures remain effective everywhere such as compulsory mask wearing in public places, temperature controls checking, regular disinfecting, etc.
This article presents some key takeaways discussed at the summit and offers insights into how some of the largest suppliers of global brands are being engaged by investors on sustainability topics, as well as how sustainable finance is rising rapidly in Taiwan among institutional investors. (For more great analysis of ESG and sustainable finance, sign up for GreenFin Weekly, our free email newsletter.)
1. Sustainable investment strategies cover roughly a third of Taiwanese AUM
Among 59 of the largest institutional investors in Taiwan managing roughly $1.5 trillion in AUM, 31.7 percent of their assets are being managed through at least one type of sustainable investment strategy. This is relatively higher than the proportion of sustainable investment assets to total AUM of investors in the U.S. (25.7 percent) or Japan (18.3 percent) in 2018.
The authors of the study from National Taipei University noted that they designed their research methodology based on the approach and definitions used by the Global Sustainable Investment Alliance (GSIA) to facilitate international benchmarking. As the GSIA latest report was published in 2018, we are yet to see how Taiwanese investors compare to their global peers for the past year.
Negative/exclusionary screening (44.6 percent), ESG integration (32 percent) and sustainability-themed investing (13.4 percent) are the top three most commonly strategies deployed by institutional investors in Taiwan.
Notably, active investment strategies such as corporate engagement and shareholder action — among the most deployed strategies in the biggest economies — represent only a small percentage of the total (5.1 percent) in Taiwan.
However, these strategies are increasingly gaining momentum and are expected to continue to ascend as investors come forward in supporting companies in understanding how they can best strengthen their ESG-related strategies and goals, and link them to the core business model.
2. Reporting keeps evolving to better address investors needs
In order to strengthen corporate governance and stewardship, the Financial Supervisory Commission (FSC), the local regulator for financial stability, in the last decade introduced a progressive series of directives and measures under the "Corporate Governance Roadmaps" and "Green Finance Action Plans."
As part of the Corporate Governance Roadmaps, first introduced in 2013, Taiwan became the first country in Asia to require its largest listed companies, and those in specific industries (food, chemicals, finance and insurance) to produce sustainability reports in line with the latest GRI Standards. This was done for the purpose of introducing better reporting practices on issues that affect multiple stakeholders.
As the financial sector undergoes a fundamental reshaping — best described by BlackRock’s CEO Larry Fink — the FSC introduced in 2020 new reporting requirements for companies to better address investors’ preferred reporting framework choices. As a result, the Sustainability Accounting Standards Board framework and the recommendations from the Task Force on Climate-related Disclosures have emerged and are expected to become part of companies’ reporting cycles starting in 2023.
When the FSC introduced these directives, the government’s aim was to improve corporate transparency and accountability with the wider public. While this still remains an important objective, there is also increased recognition that in order to achieve it, institutional investors, as key providers and allocators of capital, are a key force in the stewardship of corporate sustainability. Hence addressing investors’ reporting needs and promoting sustainable and responsible investment practices — as described in the Green Finance Action Plans — among investors to deliver better stewardship is a key area of focus for the years ahead.
3. Investors can play a transformational role in guiding corporate sustainability
One of the most awaited discussions at the summit was a panel under the theme "No ESG, No Money: Communication Strategies Between Companies and Investors," which brought together high-level executives from BlackRock, Bureau of Labor Funds, Cathay Life Insurance, Foxconn, PwC and the Taiwan Stock Exchange Corporation.
A question from the audience was raised about what some of the deepest personal impressions of investors are when engaging investee companies. "Engagement comes in stages," said Andrew Liu, president of Cathay Life Insurance, while sharing the story of Cathay’s experience working with Foxconn. Liu explained how in the last four years, Cathay and Foxconn achieved consensus on their ESG strategy.
In the first year, as a signatory of the Climate Action 100+, Cathay engaged systematically its top 10 largest investee companies in Taiwan to improve their climate performance, including introducing some international frameworks and methodologies. However, from the end of 2017 to beginning of 2018, due to several changes in the department of Foxconn’s investors relations and its then-staff’s lack of familiarity with environmental, social and governance (ESG) issues, the communications between both sides on this front were stalled.
Foxconn is one of the largest companies in the world in both revenue (about $173 billion) and number of employees (about 1 million people). In the past, the company has been involved in a series of controversies. Due to its size, selecting priority ESG topics and scaling up change initiatives took time to evaluate and implement, according to current chairman Young Liu.
In mid-2018 at Foxconn’s annual shareholder meetings, Hermes Investment Management, on behalf of its investors, publicly expressed that it hoped Foxconn could come out with better disclosures, transparency and management regarding a number of ESG issues. This gave Cathay a new opportunity to reinstate talks with Foxconn on climate issues.
In 2019, Liu (who was not the chairman during the aforementioned shareholder meeting) led a Foxconn delegation that met with senior executives at Cathay to discuss the latest international ESG trends and understand how to move forward. Finally, in November, Foxconn announced a set of new commitments, including a greenhouse gas emissions neutrality goal by 2020 and a pledge to take actions on climate-related goals as proposed by Climate Action 100+.
"A true leading business is not only a leader in the business world but also in the society. True sustainability is delivered by a combination of EPS + ESG. Without any of those components, there is [no] sustainability at all," Liu offered in his closing statements.
4. Corporate procurement requirements are decarbonizing supply chains
One of the last summit sessions included a keynote by Lora Ho, senior vice president of Taiwan Semiconductor Manufacturing Company (TSMC), who talked about how TSMC’s decarbonization efforts and procurement strategies are mobilizing the adoption of renewable energies, transforming its suppliers and helping its corporate clients achieve energy efficiency.
Earlier this year, TSMC made international headlines when its stock price rose significantly after news that Intel will outsource a significant part of its production to the company. This spike briefly made TSMC one of the top 10 largest companies in the world by market capitalization. It was an early adopter of ESG considerations as part of its business model.
TSMC is Taiwan’s largest corporate purchaser of green energy and also the largest corporate consumer of electricity. (In 2019, it is estimated that TSMC consumed about 5 percent of the grid’s total electricity output.) As TSMC’s operations continue to grow and demand for its products continues to increase, so has its appetite for renewable energy. In early 2020, TSMC and offshore-wind leader Ørsted signed the world’s largest renewables corporate power purchase agreement (PPA). This commitment is part of TSMC corporate responsibility vision, but it also addresses the needs of its clients, including Apple, which wants 100 percent of its supply chain to be powered by renewable energy.
TSMC also joined the RE100 initiative last year and announced a commitment to use 100 percent renewable energy and zero indirect emissions by 2050. The company has established a renewable energy taskforce to actively participate in the carbon trading market and drive renewable energy through procurement.
In Taiwan, the production of renewable energy is only a small percentage of the total (about 6 percent in 2019), but TSMC’s commitment and engagement with the government and its suppliers is helping to promote the adoption and acceleration of renewable energy.
Lastly, Ho talked about how TSMC’s products can help corporate clients achieve energy savings and efficiency at the downstream stages of the value chain. Although TSMC’s production operations are very energy-intensive, its products are very energy-efficient: The company estimates the energy saved by using its end products is about four times more than what TSMC expends annually in the production process.
The rapid adoption of sustainable investing strategies and global brand commitments to become circular and carbon-neutral are beginning to drive change within global suppliers. As the cases from Taiwan demonstrate, active and continuous engagement and support — whether from investor to company or company to supplier — are very important components required to draft an effective strategy and its implementation.
The future remains uncertain for business in light of the COVID-19 recovery process and the climate crisis. But the events of 2020 have demonstrated that the earlier a company adopts ESG considerations — whether in their investment process or operation — the sooner it can ensure resilience in uncertain times. The challenge for the future lies in identifying the most effective areas of action and collaborating with others to scale up change.