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Shift to the social in ESG gaining traction globally
Singapore, Australia, Japan lead way over emerging markets still environment-focused
Jayde Cheung   16 Dec 2024

Global corporates, after years of fixing their overall environment, social and governance ( ESG ) efforts on the environmental and governance aspects of the sustainable investing framework, are shifting their focus towards its social pillar, according to a recent report.

The shift in focus was triggered by the intensive use of data and artificial intelligence ( AI ) that came after the Covid pandemic, finds the Sustainability and Climate – Trends to Watch 2025 report, published by US index provider MSCI. And this shift was particularly evident with data security- and supply chain labour management-related issues, which, since the pandemic, have come about more frequently.

Tapping data and AI intensively, the information technology ( IT ) sector has augmented its awareness towards social factors. The industry doubled the risk weighting on human capital development compared with 2014 and has stepped up privacy and data security development by over 60%, according to the report. In line with the deflated environmental sentiment, the risk weighted amount for emission-related worries in the IT sector has been reduced by approximately 40%.

And this shift towards social factors has proven decisive to financial performance. In the Asia-Pacific region, the financial performance gap between the highest and lowest socially-rated companies further widened from 10% in 2014 to nearly 70% this year.

Nonetheless, sustainability priorities vary across the region. Social pillars gained more recognition among Asia’s more developed countries, including Singapore, Australia and Japan, while emerging market countries still expend a major chunk of their efforts on the environmental issues.

“Investors setting asset allocation targets then need to understand,” the MSCI report notes, “that not only can a switch between asset classes change the exposure to sustainability risks, but so can geographic exposure.”

Carbon market

Apart from the headways made in the social aspect, the Asia-Pacific region has shored up the carbon market through emphasizing quality over quantity.

The proportion of the lowest-rated retired credits between 2022 and 2024 shrank from 29% to 16%, the MSCI points out. On the other hand, highly-rated credits accounted for 12%, doubled from 6% two years ago. This marked a significant improvement in the carbon market quality, the report notes, despite the fact that almost half of the carbon credits are still used on the lower-rated project.

Going beyond just having a trading system, the carbon market has remarkably driven down carbon emissions. Material users of carbon credits, according to MSCI, reduced their scope 1 and 2 emission by 3.6% yearly, compared with 1.5% among non-users.

“Firms that were using carbon credits were more transparent than non-users in disclosing their Scope 1, 2 and 3 emissions,” the report explains, “and more likely to have set credible emission reduction targets.”

Looking ahead, demand in the carbon market will be further enhanced as the Carbon Offsetting and Reduction Scheme for International Aviation,  or Corsia scheme, will be mandatory for all airlines in 2027, and compliance regulations are increasing in various international markets.