The election of Donald J. Trump as America’s 47th President has brought us back to an era of governing via social media, with his various pronouncements on X (formerly Twitter) and Truth Social moving markets. While markets are currently obsessed with tariff-related issues, ESG investing has also been under fire due to several consequential changes in US policy, leading some to question its future. I believe the underlying premise for ESG investing has not changed, and we continue to take a pragmatic approach to our investments in Asia.
ESG Under Trump
Looking at the various policies President Trump has advocated, there are numerous challenges to the classic ESG framework. On the environmental front, carbon emission reduction is a key focus for many companies, yet Trump has pledged to remove subsidies for electric vehicles under the Inflation Reduction Act while pledging to increase hydrocarbon production in the US. Meanwhile, the US Department of Justice has paused enforcement of the Foreign Corrupt Practices Act. Trump has also been a vocal opponent of DEI (diversity, equity and inclusion) practices in schools and companies. Companies have quickly fallen inline, sidelining DEI activities (at least publicly). To the extent that the aims of DEI align with ESG goals, such as more gender-balanced Boards and managements, this is again another blow to ESG. US firms have been quick to read the writing on the wall and we have seen at least one major investment firm watering down their ESG policies.
With ESG investing under siege on numerous fronts in the US, is there a future for ESG?
At the Green Trove Asia Long Short Fund, ESG is as essential as ever. We must remember that at its core, ESG has framed a collection of sustainable business practices within 3 pillars, measures that every company should consider in how they operate their business. These are practices that ensure the robustness of the business model, so that the company can operate smoothly over the long term.
For long term investors such as ourselves, ESG is about risk mitigation and minimising tail risk. To give an example, an electronics assembly company could be employing workers under unfair contracts or in squalid conditions. For a trader with a holding period of weeks or months, the driver of performance would likely be high frequency data or news flow. However, as our time horizon stretches from months to years, the likelihood of these bad practices coming back to haunt the company increases. It is difficult to pinpoint when or how it will happen – be it a sudden worker’s strike, government investigations or a loss of major contracts due to their customer’s own ESG standards. However, what is clear is that such practices form a risk to the investment thesis, and the risk grows the longer your holding period.
Thus, regardless of the stance of the current US Administration, it is important to remember that these ESG represents best practices that we hope any of our investments adhere to. To ignore ESG would be to ignore risk.
The ESG journey in Asia – finding common ground in a heterogeneous environment
ESG investing in Asia is equally important, if not more so. With ESG a nascent concept in the region, corporate governance is often uneven. However, it would be unrealistic to hold Asian corporates to the standards of developed market peers, with the latter having existed for decades and shareholding largely institutionalised. Thus, we see ESG in Asia as more of a journey than a point assessment.
In addition, evaluating ESG in Asia has its own unique challenges that require the investor deal with sensitivity and nuance.
The first challenge is that corporate practices differ by country and can be influenced by local culture, politics or even geopolitics. In recent years, we have seen flashpoints on numerous fronts, be it the Ukraine-Russia war, the ongoing Gaza conflict or even the use of Xinjiang cotton. To take the last example, Western clothing brands have been careful to remove Xinjiang cotton from their supply chain, but for China brands doing so (publicly) would alienate the domestic consumer base. As an investor, should we acknowledge the allegations of forced labour, or follow the local narrative that denies it? Should we then refuse to invest in Chinese fashion brands? Navigating these contradictions in Asia is important, and regardless of which side we stand on, there needs to be a clear risk assessment.
The second challenge is that many Asian companies are founder/family-led and have yet to transition to a fully professional management. Orthodox ESG dictates that the Chairman and CEO role should be split, but a founder is unlikely to bring in an independent Chairperson/CEO, and asking him to do so is a guaranteed conversation-killer. Let’s not forget that even the venerable investor, Warren Buffett, still holds both Chairman and CEO titles at Berkshire Hathaway at the young age of 94 – letting go is hard to do. Thus, one cannot approach ESG dogmatically.
The third challenge is in looking beyond quantitative measures of ESG in the region. While financial metrics are backed by accounting standards and financial reporting. ESG ratings attempt to quantify more heterogenous measures, namely the company’s business model, then stack rank the companies. This gives rise to two issues, namely appropriateness, and disclosure.
For appropriateness, we often see companies in the same industry lumped together and graded accordingly, with little regard for their differing business models. In some cases, decisions have been made from the Western lens. For example, we have seen Asian textile companies ranked alongside their Western branded apparel customers, with the former then marked down for not having a “responsible advertising policy.” While evaluating, say, Nike on their advertising practices could make sense, expecting a textile mill to follow the same standards clearly defies common sense.
Disclosure remains another issue in Asia, as sometimes poor scores reflects the absence of reporting, rather than actual poor practices. It is worth noting that Asia has numerous companies in the supply chain of Western consumer companies such as the Apple’s and Unilever’s of the world, and the latter have applied their own ESG standards on their suppliers. In other words, some of these poorly-rated companies could already be following good practices, even if their ESG ratings do not reflect that.
So how can we approach ESG in Asia?
The most important factor, we believe, is engagement with the company. Engagement allows us to gauge whether their ESG efforts are real or window dressing. It also gives us an opportunity to pinpoint reasonable areas of improvement, such as disclosure or targeting certain levels of carbon emissions, especially when competitors are already doing the same. As the saying goes, a journey of a thousand miles begins with a single step. As our relationship with the company grows, we have in some cases even offered advice on how to improve the quality of their ESG reporting.
The Imperative for Continued Engagement in Asia
Even as the US appears to be regressing under the current administration, we remain convinced that ESG remains as important as ever. Asia is new to ESG but we have seen regional Exchanges become increasingly aware of its importance, and have made efforts to have companies improve their ESG engagement. Nonetheless, there is nothing that beats engagement with the companies, and accompanying their journey towards better practices.
This article was authored by Brian Ooi, CFA, Portfolio Manager of Green Trove Investment Funds VCC – Green Trove Asian Long Short Fund. The Fund seeks long-term capital appreciation by investing in fundamentally strong, high-growth companies primarily listed in Asia, while selectively shorting structurally or cyclically challenged businesses. Opportunities are identified through a disciplined bottom-up approach, with positions typically held over multiple years. Market exposure is actively managed using a proprietary macro-overlay. The Fund considers robust ESG practices essential to risk management and actively engages portfolio companies on ESG matters.
About Swiss-Asia
Swiss-Asia Financial Services Pte Ltd provides Green Trove Asia Long Short Fund with a robust and scalable fund management infrastructure, enabling the Manager to focus entirely on his investment strategy. Through Swiss-Asia’s CMS-licensed platform, the Fund benefits from a streamlined fund setup process, established regulatory frameworks, and institutional-grade middle and back-office support. This operational excellence allows the Manager to dedicate his time to value generation, investor relations, and ESG engagement, while maintaining full independence and flexibility. The partnership exemplifies Swiss-Asia’s commitment to empowering boutique managers with the tools to compete at a global standard.