ESG engagement and stewardship with Asian companies

Engaging with companies on Environmental, Social, and Governance (ESG) issues is a cornerstone of Pictet Asset Management’s responsible investment strategy. Over the past few years, we have been stepping up our engagement and stewardship efforts with companies in Asia Pacific as management teams across the region are increasingly willing to have meaningful ESG discussions with investors.

For a meeting to be considered an engagement, there must be clear and measurable objectives. We do not consider all routine or monitoring interactions to be engagement.
- Juan Salazar, Senior Engagement Specialist

Below are a few examples to illustrate how ESG engagement with Asian companies works in practice.

Engagement case

Human capital is a critically important source of corporate value creation in the modern economy. Workforce-related reporting provides crucial information for investors to make an informed assessment of a company’s approach to managing human capital risks and opportunities.

Alibaba, which has over 200,000 employees, had made some improvements in disclosure, but the scope and quality of the information provided was not enough for investors to have a good understanding of the key areas of risks and how effectively they were being managed. This we felt was of particular importance in the context of the backlash sparked by the controversial 996 work culture in the Chinese tech industry.

Engagement action

With the lead of Pictet’s Emerging Markets Equities team, in close collaboration with the Pictet's Digital team, we first engaged with Alibaba on this topic in 2022. We have met via calls and face-to-face meetings a couple of times since. From the start of the dialogue, it was clear that the company was open to making changes. There was already an important degree of internal buy-in to provide additional ESG disclosures, including those related to its employees. Our dialogue was, therefore, focused on understanding existing workforce data measurement and tracking practices, and clearly outlining our expectations around disclosures. We also shared examples of what we believe best practice is, strongly encouraging that the company report on metrics that are most relevant to its workforce and strategy – and which are, accordingly, material to investors.

Outcome

The scope and quality of workforce disclosures that Alibaba includes in its annual ESG report has improved meaningfully over the past two years. The company now reports on data across material topics such as gender and age makeup of the workforce, turnover rates, number of employees who have undergone training and development programmes, and occupational health indicators. While there is room for improvement, including around the narrative provided to help put in context metrics and indicators, we welcome the progress made. Investors are now better placed to understand how Alibaba manages its human resources to help create value over the long term. 

Engagement case

TSMC is one of Taiwan’s largest electricity users – a report from S&P Global estimated that TSMC’s electricity consumption currently accounts for eight per cent of Taiwan’s overall usage, a figure which could rise to almost 24 per cent by 2030 as TSMC continues to manufacture increasingly advanced semiconductors.

Currently, over 80 per cent of Taiwan’s energy needs are generated by coal and gas-fired power plants. With the government struggling to continue subsidising power, the cost of electricity is on the rise. This, together with the country’s ambitious, yet challenging decarbonisation goals, means that the energy landscape is poised to change. To survive and create value in such an environment, TSMC will need to think through its decarbonisation strategy, keep up with a shifting landscape of market opportunities and policy, and make swift decisions.

Engagement action

In 2023, we set out to engage with the company on its approach to decarbonisation. We started by engaging on a one on one basis via email exchanges with Investor Relations, expressing our support for actions to move to 100 per cent renewable energy by 2040, reduce Scope 1 and 2 emissions, and the net zero by 2050 goal. At the same time, we expressed our concern for the company’s decision to drop its commitment to set science-based emissions reduction targets. We encouraged this decision to be reconsidered in the near term. In 2024, we had an ESG-focused meeting for the first time during which we discussed the challenges of setting science-based targets as demand for AI capable chips grows and Taiwan’s energy mix remains dependent on fossil fuels.

Given the complexities of this engagement, and the significance of TSMC in the Taiwanese but also global contexts, we decided in July 2024 to join a collaborative effort – the IIGCC’s Net Zero Engagement Initiative (NZEI), to complement our one on one engagement. We hope this will increase our influence and reach and amplify the impact of the engagement.

The investor group sent a letter outlining expectations, including to set science-based targets, disclose actions to deliver on decarbonisation commitments, and demonstrate that capital expenditures are consistent with achieving net zero by 2050. We requested a meeting with the company to discuss our expectations and further learn about management’s thinking and potential actions going forward. 

Outcome

At the time of writing, we are expecting a response from the company and hopefully an invitation to meet. We look forward to an insightful and constructive discussion that may help drive TSMC’s efforts to decarbonize its operations in line with the ambitions of the Paris agreement. 

Engagement case

The push for mandatory environmental disclosure is gaining momentum globally, supported by the increased availability of robust guidance and international standards. Policymakers across Asia, including in India, Hong Kong, Singapore and Taiwan have taken or will soon take action to make such disclosures mandatory.

We are concerned that large banks across Emerging Asia lag their peers in other parts of the world in preparing and publishing climate-related financial disclosures. Besides such disclosures increasingly becoming mandatory, they are a key enabler for corporate climate action – they help companies identify potential risks and opportunities to which management can respond proactively. Importantly, they help investors make better informed decisions along the investment decision-making process, from company analysis and portfolio construction to risk management and monitoring and active ownership. 

Engagement action

In 2023, our Emerging Markets Fixed Income team selected a small number of banks in the region for a focused engagement programme to drive more robust climate change risk management practices, starting with enhanced disclosures. We chose to pursue this engagement on a collaborative basis to increase our influence.

We joined a small group of investors coordinated by the Emerging Markets Investors Alliance to engage with India’s HDFC Bank, and the IIGCC’s Banks initiative to engage with two of China’s largest banks, Agricultural Bank of China and China Construction Bank.

During 2023 and 2024, we had constructive conversations with representatives from all three banks. During these discussions, we clearly outlined our expectations and, perhaps, more critically at this early stage in the engagement process, improved our understanding of the challenges the banks are facing in gathering the necessary data, building internal capacity, and setting effective climate governance structures. 

Progress

All three banks have shown willingness to engage and improve their practices. It helps that they already disclose to varying degrees information on their climate change risk management practices and performance. They either aspire to or have committed to align their disclosures with the TCFD over the short- to medium-term. We plan to meet the banks again starting in Q2 2025 to continue the dialogue.