The off-site construction meant cutting wastage by up to 80 per cent, according to a 2021 paper on environmental engineering by the University of New South Wales. It also meant savings on transport costs, which translate to cheaper cost and lower carbon emissions.

“This kind of [decarbonisation] was increasingly rewarded by the market,” Smith said, declining to name the builder, citing Abrdn’s confidentiality. “However, the company was not talking about this, and was not disclosing this in a way that the market could recognise.”

With Abrdn’s guidance and regular calls, the developer disclosed more data about its energy and water efficiency, as well as how much waste it generated. As a result, its MSCI rating on environment, sustainability and governance (ESG) improved from “B” to “A,” accolades that helped it cut its financing costs.

ESG is moving up the agenda list in boardrooms all over the world, as regulators tightened their rules for publicly traded companies to disclose their risks and opportunities, targets and action plans for improving their ESG performances.

Climate change, caused by excessive greenhouse gas emissions from human activities, is one of the most urgent ESG issues requiring corporate action. More than 190 nations pledged in 2015 to contain global warming within 1.5 degrees Celsius to avert changes in the world’s climate patterns, which carry disastrous social and economic consequences.

A lot more needs to be done, as fewer than 60 per cent of the companies covered by Fidelity International’s 123 analysts during a March survey set aside enough funds to achieve net zero by 2050. That means they are not doing enough to meet the prerequisite to meet the 1.5-degree target.

Technological gaps, lack of corporate drive and funding stood in the way, said Fidelity, which oversees some US$728 billion of client assets. Europe led the poll with 69 per cent, roughly double the percentage of Chinese companies.

Government regulations, investor engagement and shareholder action are among the most effective ways of enhancing ESG practices, Fidelity said.

“Positive progress is being made, but Chinese companies have further catching up to do if they are to get in step with the government’s [emission reduction] targets,” said Tan Jenn-Hui, Fidelity’s global head of stewardship and sustainable investing.

While there is plenty of evidence showing that global asset managers are engaging actively, and that engagement tends to result in success, Asia and China lag behind the US and Europe, said Darwin Choi, a finance associate professor and associate director of the Centre for Business Sustainability at the Chinese University of Hong Kong.

“Stock ownership is more concentrated and ESG data is poorer in Asia and China, making ESG engagement less effective,” he said, adding that weaker climate awareness and corporate emissions data quality are key barriers which can be improved through education and regulations.

Hong Kong’s stock exchange is trying to make the climate-related disclosures under its ESG framework mandatory, as opposed to the current “comply or explain” approach, in its three-month market consultation finished earlier this month.

Hong Kong’s Securities and Futures Commission (SFC) went further, requiring all fund houses to establish governance structures and policies, and disclose how they manage climate risks and opportunities for each investment strategy and fund they manage. The tougher rules are aimed at helping investors make informed decisions and prevent greenwashing, the act of making unsubstantiated environmental claims about investment products.

Those with at least HK$8 billion (US$1.03 billion) of clients’ assets in the city must also disclose the emissions footprint of their fund products calculated from their investees. Drawn by returns and good intention, retail investors have embraced such products.

Hong Kong’s number of SFC-authorised ESG funds increased by 55 per cent to 188 as of March 31, with the total assets under management rising by 6 per cent to US$151.7 billion from a year ago.

Fund managers who want to achieve the decarbonisation targets of their investment portfolios can either sell down their shares in carbon-intensive companies, or persuade the investees to reduce their emissions at a pace aligned with the funds’ targets.

The latter is the more constructive approach, said Patrick Bolton, a finance and economics professor at Imperial College London.

“Once you sell your shares in a company … most likely the shareholder who will replace you will be less concerned about its emissions,” Bolton said at a Hong Kong University Business School ESG forum on June 23. “That is one criticism of the divestment strategy.”

However, engagement must be accompanied by the threat of divestment if no improvement is delivered, he added.

“Otherwise, what’s the incentive for a company to engage?” he said. “Inevitably engagement has to be linked to divestment at some point.”

Most clients of asset managers do not want to divest for the sake of achieving short-term decarbonisation goals, said Schroders head of Asia-Pacific sustainability strategy Mervyn Tang. Instead, they prefer to balance decarbonisation, returns and portfolio diversification.

“What we want to see is companies having a plan to get to net zero and not being behind their peers in that plan,” he said.

Engaging with investees on climate issues is not straightforward, said Ben McQuhae, founder of the law firm Ben McQuhae & Co., and a co-founder of the Hong Kong Green Finance Association. He likened the challenge facing global asset managers to an “obstacle course.”

First, there are major differences in climate risks and opportunities disclosure requirements across the many jurisdictions they invest in, which adds to the costs and difficulty of performing comparative analysis for investment allocation decision-making.

While this is likely to be narrowed over time after the launch of a set of global baseline disclosure standards published by the International Sustainability Standards Board last month, the pace of change is uncertain.

“It is challenging enough to keep up to date with what the regulations say, it can be even more challenging to predict how [the rules] will be applied and enforced in the context of climate or broader ESG disclosures, or to forecast the direction of policy travel,” McQuhae said.

ESG ratings agencies and data providers will play an increasingly important role in putting pressure on investees to cut their carbon emissions, by arming investors with independent data and insights on investees’ relative ESG performance, he added.

“However, the ratings industry is still in its infancy, and it will take time for the regulatory landscape to settle and for an inevitable industry consolidation to occur,” he said.

Transparency on data sources, methodologies and management of conflicts of interest were highlighted in a report published in late 2021 by the International Organisation of Securities Commissions as key ratings and data issues that need to be tackled by securities regulators worldwide.

Many asset managers are only at an early stage of engagement with investees in Asia on climate and ESG issues, which showed mixed results.

FSSA Investment Managers, a unit of First Sentier Investors, started a climate engagement programme with investees in 2021. It assessed the progress of 72 companies that accounted for three-quarters of around US$30.3 billion of client assets it managed at the end of last year.

One encouraging engagement experience is Fujian province-based Anta Sports, the world’s third most valuable sportswear company.

FSSA’s ESG report said it has shown “material improvement” last year by committing to establish carbon reduction targets across its entire supply chain, and become carbon neutral by 2050.

Meanwhile, engagement with Chinese industrial manufacturer, one of FSSA’s heavy-emitter investees, has proved disappointing, managing partners Michael Stapleton and Martin Lau told the Post. They declined to name it.

Despite a 126-page ESG report and formation of a carbon-management committee, this firm showed poor “tangible” disclosures by only setting a one-year target to maintain emissions with no medium or long-term reduction targets, they noted.

UK-based Legal & General Investment Management, which manages around US$1.4 trillion of client assets, has been reporting on its climate engagement activities since 2018.

This year, it put 342 firms on its list for voting sanctions, compared to 80 in 2022 and 130 in 2021, for not meeting its minimum standards on climate change disclosures and mitigation actions.

Some 14 companies – including five Chinese state-backed ones – were added to its divestment list this year for failing to meet its “red lines”, up from 12 last year.

The new additions are Air China, which LGIM said has failed to set an emission reduction target, and Cosco Shipping Holdings which LGIM said has failed to commit to using low carbon fuels and has a low reduction ambition compared to its leading peers.

China Construction Bank has been on LGIM’s sanction list since 2018 for the lack of disclosure of the carbon emissions of funded activities, and policy to reduce its large financing portfolio to the coal mining and power sectors. All three companies did not respond to requests for comments.

Abrdn’s Smith said it is hard to tell whether its engagement might have helped the Chinese developer achieve a higher market valuation.

“A better view of quality or better ESG rating is not necessarily a valuation issue per se, [even if] research says it is,” he said. “But we think it can help companies reduce the volatility of their shares and attract stickier investors.”