Economy & Business
Taiwan and ESG
The Taiwan government and major industry players have recognised that ESG must become an indispensable part of best practice corporate development in Taiwan but are companies taking the necessary actions?
By Paul Shelton
With Taiwan's focus on renewable energy, a publicly announced 2050 net-zero carbon emission target (and to bring it even more closely to "home" (well, the writer's home at the very least), the 3 March power outage (that affected some five million households in Taiwan)) it is important that we understand what must be done to ensure Environmental, Social and Governance (ESG) is fully integrated into best practice within the corporate environment.
ESG investing began as far back as the 1960s when investors with a socially responsible mindset began excluding investments or entire industries (e.g., there is evidence, from the 1960s of investors excluding tobacco production from their investment portfolio or any involvement with the then South African apartheid regime).
However, the ESG as we know it in Taiwan today seems to have been coined in 2004/2005 in a landmark study entitled "Who Cares Wins". The study was initiated by the UN Secretary General and UN Global Compact in collaboration with the Swiss government and was endorsed, some 18 years ago by no fewer than 23 financial institutions collectively representing more than US$6 trillion in assets.
But how does ESG relate to Taiwan and how did Taiwan seize the ESG mantle from the 2004/2005 study?
Over the past decade, the Taiwanese government determined that ESG must become an indispensable part of best practice corporate development in Taiwan. Further, as a critical player in the global supply chain, Taiwanese industry players themselves sensed, early on, their (domestic and global) customers' and consumers' high ESG expectations. For the sake of Taiwan's global success, as we see it today, it was realized that the transition to sustainable development was no longer a choice, but an inevitability for companies and the banking and non-bank financial industries in Taiwan. Even then, the phenomenon was coined "No ESG, no money"!
So, how has Taiwan performed? As early as 2017, Taiwan was already recognized as being "number one" in Asia on the disclosure of the critical areas of governance, sustainability and social impact in corporate board and leadership activities. Board composition became a critical factor in business success and to add further structure to these achievements, in 2019 the Taiwan Depository and Clearing Corporation (TDCC) was tasked with promoting good corporate governance. Accordingly, the TDCC launched an online dashboard (which quickly become a reliable reference for corporate issuers, financial institutions, and retail investors) of the ESG scores of locally listed companies.
In addition to government and regulatory action, Taiwanese consumers and the international consumers of Taiwanese goods and services have very clearly shown that they care about how companies conduct themselves and continue to show a willingness to pay more for products that are produced responsibly.
In 2020, the Taiwan Financial Supervisory Commission (FSC) built upon these earlier ESG foundations by promoting the "Corporate Governance 3.0-Sustainable Development Roadmap" and "Green Finance Action Plan 2.0" to accelerate the sustainable development of Taiwan industry from the perspective of corporate governance and financial investment (or as it is often referred to as, sustainable finance – being the practice of integrating environmental, social and governance criteria into financial services to bring about sustainable development outcomes, especially including the mitigation of climate change).
In December 2021, the Chairman of the FSC, Huang Tien-Mu, noted, at the "2021 Cathay Sustainable Finance and Climate Change Summit", there are five key points to ESG in Taiwan:
- Consistent targets
- Being adjustable in response to ongoing change
- Government policy must be fair and proportional given that companies and institutions differ in scale
- Assistance must be available to disadvantaged groups and companies or institutions with fewer resources
- Goals must be achievable. Workable strategies create responsible participants (at all levels with regards to sustainable finance and the mitigation of climate change).
Chairman Huang noted that whilst climate change mitigation and sustainable finance are a high-level policy aspiration for individual companies, ESG also provides an important opportunity for organisational reform.
Again, in a clear commitment to ensuring that Taiwan maintains the momentum on firmly established sustainable finance practices, the FSC has announced that it intends to test three major industries, that being, manufacturing, construction and real estate and shipping and warehousing. Each participant must show their commitment and action on major environmental goals (including Taiwan's announced goal of net-zero carbon emissions by 2050) and social protections (such as human rights, worker rights and social development). The test results from these three major industries will then provide the financial industry with a basis for assessing investment and financing opportunities.
Whilst timing for the testing (and the participants) currently remains unclear, the TDCC has provided some additional "icing on the ESG cake" by recently announcing that its ESG dashboard will see the addition of the well-known S&P Global ESG scores (within 2022) as Taiwan joins in the global push for a green recovery after Covid-19. There is no clear explanation of TDCC's choice for the inclusion of the S&P Global ESG scores. However, it seems a logical decision to draw upon one of the most advanced ESG scoring methodologies in the international market today rather than invent their own. This decision allows TDCC to leverage the S&P Global ESG Scores to gain insight into a deep range of environmental, social and governance data of sustainability scores for over 10,000+ companies, scores based on a detailed survey process and full data history dating back to 2013. Whilst there are other "international scoring systems" that TDCC could have chosen, the adoption of the S&P Global ESG scores demonstrates Taiwan's willingness to incorporate international best practice into the Taiwanese market and to play a meaningful role in the international ESG arena.
So how should Taiwanese companies be demonstrating their ESG credentials (whilst bearing in mind Chairman Huang's above-mentioned comments)? There is no simple "one solution fits all" package. No doubt, policies and procedures have been (or should have been) written and perhaps even re-written but that is simply not enough. Taiwanese companies will need to have tangible evidence to demonstrate how they have implemented and continue to implement ESG into their investment decisions and operational framework.
The ESG message and evidence of actioned commitment will need to come from the very top echelons of every institution. Governance, through an appropriate committee structure that implements the ESG policies and procedures must also be in place (and companies of sufficiently robust size and operational complexity should seriously consider whether they may need to appoint an ESG specialist or at the very least assign the ESG coordination role to an existing high level job description). Further, it is not sufficient that whatever committee structure is deemed adequate become a simple "rubber stamp" for ESG. There must be evidence of a robust deliberation, discussion, implementation, and periodic review at the committee level.
It is the writer's view, that for the test participants to perform successfully they must already be undergoing their own regular assessment, monitoring, and mitigation of relevant environmental goals and societal protections and undertaking rigorous internal stress tests with the aim of continuous improvement. This is not a time to sit back and wait. The world, even in this time of pandemic is not waiting. Market research shows that green debt issuance (including green loans and green, sustainable, and sustainability-linked bonds) exceeded US$1.5 trillion in 2021, over double the total for 2020, unabated by the global pandemic. What will be the results for 2022 and what will be Taiwan's contribution?
Let's pose a parting question, if you believe that ESG and sustainable financing applies to your organisation (however structured), then how does your internal scorecard read as of March 2022? If your score is not as good as you would wish (or what the market would expect), what steps are you actively taking to remedy any gaps? And, importantly, if you are already on the TDCC's dashboard, what is your score and what are your plans to improve your current rating?
Paul Shelton is a consultant with 30 years of experience in the international financial services and related industries with skills in all aspects of legal and financial crime compliance and regulatory relationship advisory and management.