The road to being favoured by asset owners will soon need to be paved with tangible, funded action plans on how to ensure environmental, social and governance (ESG) standards.
The commitment to ESG in corporations has to move from intentions and targets on paper into ongoing execution from the business, according to Asia representatives of Dutch APG Asset Management and British International Investment (BII).
One key focus point should be on commitments to cutting greenhouse gas emissions to as close to zero as possible, with any remaining emissions to be reabsorbed from the atmosphere by oceans, forests, and the like, the audience heard at AsianInvestor’s Southeast Asia Institutional Investment Forum in Singapore on November 22.
APG Asset Management
“What I see is that the management of most companies is well articulated about their ESG program and sustainability plans. But it is a very different picture when they talk about capex (capital expenditure) and opex (operating expenditure) plans, and projects that show how they can get there,” Park Yoo-kyung, head of responsible investment and governance in Asia Pacific at APG Asset Management, said.
While most company CEOs say they want to achieve net-zero by 2050, some companies may only have about 5% of its energy coming from renewable energy, Park elaborated. When the Dutch pension fund manager then asks about capex plans to achieve net-zero and replace the fossil fuel business, the companies might not have a plan in place.
“Many are waiting for some new tech knowledge to appear in, say, 2035, and if they then put their money in before 2050, they believe they will achieve net-zero,” Park said.
Instead, companies’ efforts towards net-zero need to be measured and mapped, according to Park. And while many companies lack this step, some have managed to create the required action plans, for instance by budgeting with planting trees as emission compensation or establishing renewable energy plants for self-supply.
“When companies present plans to establish solar panels and wind farms, then I actually trust them. Without that, I think nothing is going to happen. When it comes to ESG and climate change action, we can't be a spectator, we must be an actor, we have to be in the game and then put our money there,” Park said.
Srini Nagarajan, managing director and head of Asia at BII, agreed that companies and asset managers need to have a clear proof of plans for achieving net-zero compliance.
“In the asset owner community worldwide, it's difficult to raise money today if you do not have minimum standards on environmental policies,” he said.
BII is the development finance institution of the UK government and has, since 2011, focused on the emerging markets of South Asia and Africa.
In these emerging markets, Nagarajan pointed out the responsibility that investors and asset managers have beyond just picking the right champion companies that will effectively grow their business.
“If you're a value investor taking a term risk in any organisation as an equity investor, you better take care of the environment around you. Otherwise, you're doing yourself and the investment a disservice, and you might as well be an ETF investor, make your money and leave,” Nagarajan said.
Both Nagarajan and Park believe that investments need to have an impact beyond profits, and that ESG efforts must be evident.
BII normally sets up ESG committees in companies where it invests. Such committees deal with non-financial matters but are also responsible for cascading the ESG agenda further down the value chain and ensuring that the effects can be seen.
“ESG should be an inherent part of the risk management framework throughout an organisation, not just at a very senior level. And it should be measurable because what is measured is managed,” Nagarajan said.
On the social side, BII looks at skilling as a very important part of its social impact.
“In every solar site we have invested in in South Asia, we started a skilling centre to reskill people, [particularly women], from coal to renewable energy, so that they are immediately employable,” Nagarajan said.
Park pointed out that when she talks to institutional investor peers, most have ESG teams in place. As integration into investments happens and ESG becomes the norm rather than a discussion, this paves the way to focusing on impact and the opportunities that follow.