ESG still seen as regulation-led in Asia

Mar 13, 2018

Responsible investing still doesn’t come naturally to Asian investors and corporates, which is why governments continue to play a lead role, experts said at AsianInvestor's ESG event.

ESG still seen as regulation-led in Asia

Investors in Asia are increasingly following environmental, social and governance (ESG) guidelines but thus far it's mainly because they have to, rather than because they necessarily want to, delegates at an AsianInvestor conference heard on Tuesday.

A number of countries in Asia have implemented stewardship codes in recent years that promote accountability and corporate governance in investments, such as the Malaysian Code for Institutional Investors in 2014, the Singapore Stewardship Principles for Responsible Investors in Singapore in 2016, and the Korea Stewardship Code and Principles for Responsible Institutional Investors in Japan in 2017.

However, ESG investing still doesn’t come naturally to some Asian investors and corporates, experts at the ESG Investment in Asia event said.

“I would say they are doing this for the sake of compliance,” Sammie Leung, director of sustainability reporting, enterprise risk management, and internal audit at PwC, told the audience during a panel discussion.

“The compliance team is telling them they need to have that checklist, so they’re now doing responsible investment and they would give me a call and ask for something to check the boxes,” Leung said.

She was not alone in that view as others cited the region's law-abiding and cautious tendencies, not least in Hong Kong.

“In Hong Kong we tend to be compliant in terms of laws and regulation, but really, in terms of embracing proactively new ideas, it is harder," another panellist Lau Ka Shi, chief executive of pension product provider BCT Financial Limited, told AsianInvestor after the event. "That’s why if it’s driven by regulation or policy, the development could be faster.”

ROLE OF GOVERNMENT

What is needed to change current attitudes is more education on ESG implementation in Asia, BCT’s Lau said earlier on the panel, and local governments should set the tone on how to execute sustainable investments.

“The government has to take the lead," she said, noting the Chinese government’s approach to ESG. “In China, the top agenda is green finance and you can see it comes from the top, so for China it’s going to be a much faster pace. Green finance is only the first step.”

A similar logic applied to Hong Kong, where green bonds and green certification schemes had formed part of the government's February budget speech.

"They’re also investing money and they’re the steward of a lot of our Hong Kong money in the sovereign wealth fund, so they’re the one that should be asking and making criteria for choosing a fund or a fund manager,” she said.

Institutional investors in Asia could also look to Japan’s Government Pension Investment Fund (GPIF) for inspiration, Melissa McDonald, global head of product and head of responsible investment at HSBC Global Asset Management, said at an earlier presentation.

“Everyone knows the government of Japan pension scheme, the largest in the world, and the moves they’ve made to transition their portfolio to responsible investment,” she said. “It has a knock-on effect, we hope and expect, for other pension schemes in the region to follow suit.”

GLOBAL ESG TRENDS

For all that ESG investments in Asia ex Japan have lagged other regions, BCT’s Lau said, and as of 2016 only 0.8% of the region’s total managed assets were in sustainable investments, according to the 2016 Global Sustainable Investment Review.

By contrast, Europe and the US had 52.6% and 21.6% of total managed assets in sustainable investments in 2016, respectively.

Investor attitudes may finally be shifting, however, a recent survey indicates. Around 70% of institutional investors in Asia believe that incorporating ESG into investment strategies will become standard practice within the next five years, according to a global survey of institutional surveys by Natixis Investment Managers, released on February 28.

Taiwan's Bureau of Labor Funds is handing out an ESG investment mandate to external managers this year, and Kumpulan Wang Persaraan, Malaysia's second-largest pension fund, is creating ESG guidelines for alternatives investing.

The push for ESG globally will have an impact on Asia, regardless of the pace of ESG investments in the region.

“The pressure coming from abroad means that companies in Asia will be exposed very much to changing investor risk appetite for reputation risk,” HSBC’s McDonald said. “Whatever is happening internationally is going to affect the companies in Asia and the investors in Asia.”