Sustainability claims and delusions
Apollo Asia Fund: the manager's report for 2Q21

NAV of the Apollo Asia Fund rose another 8.3% in the second quarter. At the end of June it attained a new high of US$2,641.82 (Series A), 64% higher than at the end of March 2020 when markets were just beginning to rally after the pandemic-panic, and 24% higher than two years ago, in June 2019. Markets buoyed by fiscal stimulus and easy money have decoupled from economic health; indicators of wellbeing in much of the region have deteriorated sharply.

Myanmar, Hong Kong, and Malaysia, about which we wrote three months ago, have travelled further in the directions of alarm. ASEAN failed to provide effective support for the elected government of Myanmar, its replacement is not inspiring confidence, and some of February's peaceful protesters are now learning the techniques of asymmetric warfare. Some of Hong Kong's finest citizens have spent months in jail while awaiting their court hearings: so much for the presumption of innocence. ABC news asked "How did Asia's world city come to this?"

Meanwhile India shocked the world in April with scenes of overwhelmed hospitals and despairing relatives of the dead and dying, exposing the limits of prime ministerial boosterism and showing that complacency about an imminent end to the pandemic would be misplaced.

Major new Covid waves are now causing similar distress in other countries, often without the press coverage. Several countries have responded by trying to suppress news and silence critics. Some are dominated by individuals seeking opportunities for political or economic advantage, sometimes restricting activities of the public while waiving them for a favoured few. Unsurprisingly, governments thought to be acting evenhandedly find the public more cooperative than those thought self-serving. Countries where competence is a criterion for appointment to public office have fared better during the pandemic than those where it isn't. Voters in future elections may place more importance on competence and integrity - in countries where they continue to be given a choice.

Even countries which contained Covid outbreaks well during the first year, such as Vietnam & Singapore, are finding it difficult to control the more transmissible new variants. Hopes of a quick return to pre-pandemic travel are receding. More business owners (and lenders) will have to reassess viability of whole business models, rather than calculating how long they can maintain readiness for resumption. Australia's international student business, for example, seems unlikely to be the same again. Subsidies and loan moritoria have been a lifeline for many, but bankers reviewing the safety of capital must find the task very challenging. Valuation of banks, accordingly, involves bigger guesses than usual; your fund does not own any. Our readers will doubtless be appropriately wary of owning pieces of the debt mountain in any of its slickly-repackaged forms, but we are all exposed to bank health as customers and through government backstops. Most societies probably have little choice but to extend and pretend: the shape of the next banking crisis seems especially difficult to predict.

The relative magnitude of environmental crises may be even harder to predict, but the costs of climate weirding and the loss of eco-resilience are now biting hard - often in unexpected places, and in ways unforeseen. It has been interesting to learn how a heat dome forms, but distressing to see the human costs, as also from the disastrous floods in western Europe this week. For most of my career, environmental concerns were regarded as fringe; now it is undeniable that our pension funds are at risk, and investments may be affected in the near term.

The rapid growth of funds with an environmental, social and governance (ESG) mandate is noticeably affecting investment flows in Asia, but it remains to be seen how much they will change business practices. Activists have long tried to influence end-customers and major brands to highlight and improve working conditions in the factories of their suppliers. Investors provided a new lever, and this may have helped some factory workers. Usage of land, water and all natural resources, and prices paid, should be required disclosures for all companies; the public interest in the commons is too great for these to be claimed as commercial secrets. Pollution and environmental costs caused by production, usage and disposal should also be disclosed. Standard required disclosures starting with these two sections would be much more useful than current sustainability reports in which companies decide on the issues they wish to discuss; I have yet to see one which discusses the most important issues or greatest challenges.

We need to think critically about what companies do, rather than relying on what they say. A Malaysian company which claims to be "a steward of nature", "integrating responsible and sustainable environmental strategies... to protect and enrich the natural environment for future generations"¹, "to bring positive changes as a force for good and making a good future happen by protecting the environment, improving the lives of communities..."², with repeated reference to the Christian faith of the founding family, has been astonishingly unresponsive to the pleas of a wide cross-section of Malaysian society to preserve the last small remaining area of Gunung Kanthan, after apparently obtaining in 2020 an unexpected 30-year extension to its lease, the rationale and details of which remain to be clarified.³ These are the unique hills described as 'Arks of Biodiversity', with species found nowhere else on earth; a beloved landscape with magnificent caves and pilgrimage sites important to the people of several faiths. Community, cultural heritage, and endemic species, all vulnerable to instant destruction by blasting: see the unforgettable summary by Malaysia's great cartoonist, Zunar. YTL is a member of the FTSE4Good index. ESG managers, please start asking questions; friends of the family, please ask how they reconcile this destruction with their faith and stated principles.

Now, back to looking for investments for your fund...

Claire Barnes, 16 July 2021