ESG

• Recent and pending supply-chain deforestation regulations represent a new and ever-growing source of transition risks – financially-material risks with far-reaching ramifications.
• Significant developments regarding the European Union’s pending forest-risk commodity laws (e.g., inclusion of natural rubber, addition of banks to its purview) inspired this Insight.
• This Insight briefly summarises EU and U.K. deforestation regulations, then analyses potential risks and implications for issuers involved in related forest-risk commodity supply chains.

• A recently-published Insight discussed new supply-chain deforestation regulations and related  risks from the perspective of commodity-related companies (e.g., producers, manufacturers).
• Whilst that report mentioned recent developments regarding EU legislation (e.g., the addition of rubber to its forest-risk commodities), one major developement deserves more attention.
• Hence, this follow-up Insight about the EU’s addition of financial institutions (banks, investors, and insurance) to the purview of its pending forest-risk regulations, and associated risks.

• Only 12.1% of prime market listed companies have a majority of independent outside directors who can at least ensure the independence of the board of directors.
• On the nominating/compensation committees, 1/3 of companies are chaired by an inside director. Few committees have clear policies for selecting directors/CEO, and aren involved in determining compensation of individual directors.
• More companies are complying with regard to sustainability. However, it is necessary to analyze whether the target is an acceptable time frame and whether the target value is too low.

• If we want to increase women directors even to growth market companies, we can solve this problem by extending the scope of this comply-or-explain requirement to growth market companies.
• It is a fact that companies with top female executives have more women on their boards of directors. It’s required to create support to increase the number of women founders.
• Rather than setting targets for the ratio of female managers, which are vague and unworkable, a framework should be created to support female founders.

• Environmental:  KEPCO’s power transmission tower construction is destroying ecosystems and posing a climate risk in various areas, which is also why the coal mine development project in Australia was suspended. 
• Social : 58% of KEPCO’s suppliers were found to be illegal subcontractors leading to controversy over work environment issues. Also, the construction of power transmission towers sparked serious community conflicts.
• Governance : Despite KEPCO’s large deficit, the company’s moral risk and poor risk management issues, such as corruption and excessive wages of employers, continue to surface. 

• The current criteria of 10 billion-yen in tradable market capitalization is too small by definition of prime market, “market-cap suitable for institutional investors,” and should be reviewed in near future.
• It’s natural that there will be difference in the stock prices of companies that can show results that are in line with their disclosed plans and those that are not.
• Simply raising shareholder returns won’t, in theory, positively impact on stock price. Mere increased shareholder returns would be seen as sign that the company reached the end of its rope.

• In my previous analysis, I found that firms with high frequency of share repurchase cancellations increased their market capitalization during the relevant period (12/2021-1/2022).
• Even though the short-term share price performances of companies that announced share repurchases were mixed, the share prices of companies with track record of several share repurchases have risen.
• It takes certain amount of time for investors to understand the track record and the capital allocation policy is consistent with the goal of increasing corporate value over the-long run.

In our next Webinar, we welcome Analyst Soo Young Kim , who will take us through the ESG risks present in South Korea and her analysis based on negative ESG incidents. 

The webinar will be hosted on Wednesday, 21 September 2022, 17:00 SGT/HKT.

Soo Young is the Head of ESG Intelligence at Who’s Good, Asia’s first AI-driven ESG Insight Provider. Using AI technologies and public data, Who’s Good provides objective and up-to-date corporate ESG insights on Asian companies.

• The adoption of female directors is growing as Japanese investment managers follow the movement among overseas investment managers to oppose proposals for election of directors for companies without female directors.
• In Japanese companies, where peer pressure is strong, it is doubtful that the opinions of about 10% female directors can be fully reflected in the discussions and conclusions.
• Non-Japanese directors who don’t succumb to Japan’s culture of peer pressure is even smaller, and Japanese companies will be at risk if they determine management strategy without diverse values.

• While 90% of the companies listed on the prime market translate some documents into English, very few companies listed on other markets translate their disclosure documents into English.
• There is a mismatch between the documents that prime market listed companies translate into English and the documents that overseas institutional investors require to be translated into English.
• Few companies with high foreign ownerships have translated their annual securities reports, convocation notices (business reports) and corporate governance reports into English, which overseas investors need to translate into English.

• The inclusion of the requirement to use e-voting platforms in the Corporate Governance Code has led to increasing number of companies using e-voting platforms.
• The number of participating companies has increased from 1,540 in March to 1,737 in August. Of the companies participating in e-voting platform, 92% are listed companies in the prime market.
• It is only to be hoped that in the future, companies will focus on improving communication between shareholders and management at general shareholders’ meetings.

• This insight highlights the global backlash against ESG. This is a collaborative project between Douglas Kim and Kyle Rudden. 
• In particular, my insight will focus on three recent places of major backlash against ESG including United Kingdom, Texas, and Florida.
• Despite efforts by ESG investors to increase renewables, a return to more BALANCED energy supplies is more likely, expanding the use of nuclear power and domestic oil & gas sources. 

• The reason why TCFD’s progress is the slowest is that prudent companies are still exploring the minimum line that should be taken by other companies to see how they’re responding.
• The lack of specific numerical targets for ensuring diversity, which are not explicitly stated in the Corporate Governance Code, is the main reason for the slow progress.
• While some formal progress has been made, such as the establishment of nominating/compensation committees, there are many challenges ahead. Scandals have occurred even in companies that have implemented formal standards.