Companies also identified climate change as the largest external risk to their businesses after the COVID-19 pandemic in the recent EY Global Capital Confidence Barometer.
Part of this is a recognition among more farsighted companies that the buyer universe for less ESG-friendly businesses is shrinking. While liquidity remains strong for now, particularly from private equity (PE) investors, this cannot be relied upon for businesses with high emissions or other negative ESG profiles.
Conversely, buyers of all types (corporate, PE and special purpose acquisition companies (SPAC)) have strong appetite for businesses with a positive ESG track record. This is especially true in the areas of renewable energy and technology efficiency.
Growing Asia-Pacific focus on ESG is evident from the increasing involvement of company boards. This topic is increasingly treated as a board-level issue, requiring leadership to run ESG committees and consider the interests of broader stakeholders and community.
Both factors are clearly at work in a new trend to split companies with significant environmental or other ESG exposures. This divides entities into heavier-emitting and cleaner or zero-emission divisions. It has been seen mostly in Australia’s resource-focused economy so far, but has clear potential to spread further in the region.
Clearly, splits of this sort can be the precursor to larger structural actions. These can include divestment, demerger as a result of differential valuation, and capital and investment structures that will be largely a function of emissions intensity.
Lately, social issues such as diversity, equality and access to health care have gained focus, too. This has been spurred both by the COVID-19 pandemic and social justice movements around the world, be it in the US or in other countries.
Influenced by these global trends, Asia-Pacific companies cite social issues as the most important trigger that helped prompt their last divestment. Over half (52%) identify such issues as a key factor.