Asia's ESG ratings sector still developing, says OECD

January 21, 2022

ESG ratings are still in the early stages of development in the Asia Pacific region, according to a report from the OECD.

The Trends in ESG Investing and Quality Infrastructure Investment in Asia-Pacific report found that relatively few listed companies were making ESG disclosures, resulting in disparate returns from portfolios and presenting difficulties in analysis.

However, the ESG ratings sector was developing quickly, the OECD said, and required further work and development to improve its quality and coverage. Indeed, just last year a group of Asia-based asset owners came together to form the Asia Transition Platform, with an initial focus on carbon risk at financial institutions.

“The assessment shows that, when analysing risk-adjusted returns, different providers’ data and methodologies have a strong impact on the results,” the report stated. “This suggests that further work is needed in order to improve ESG investing and that historical returns over the past 10 years do not fully reflect the benefits of ESG integration.”

The lack of coverage meant the average market capitalisation of ESG-rated companies was lower than in more developed ESG markets such as the US. This is likely to change as the emerging market becomes more developed and ESG considerations become more commonplace.

The OECD’s research also found a low correlation between ESG fund ratings and performance. However, the organisation emphasised that this did not mean highly rated ESG funds did not outperform, but instead that outperformance could be generated regardless of ESG rating.

“This indicates that a number of other factors, such as the performance of individual fund managers relative to the benchmark, the investment strategy of the funds and its implementation, the specific asset allocation have a material impact on returns,” the OECD’s report stated.

The full report can be accessed here.