Some of Europe's financial institutions are making a case to further improve the implementation of environmental, social and governance (ESG) standards in order to eradicate growing anti-ESG sentiment, which in turn hinders the success of impact investing.
Speaking at AsianInvestor’s Southeast Asia Institutional Investment Forum in Singapore on November 22, the Asia representatives of both Dutch APG Asset Management and British International Investment (BII) highlighted what was needed to to achieve increased sustainability investment support.
That includes clear proofs of concept, higher thresholds and more education to raise awareness about the value and urgency of ESG.
“We have no choice but to have higher standards on ESG. And there must be education and proof of ESG and its impact, not just talks about it,” said Srini Nagarajan, managing director and head of Asia at BII.
BII is the development finance arm of the UK government. It has focused on emerging markets in South Asia and Africa since 2011.
In these markets, BII conducts ESG workshops to educate and establish standards. The British institution also showcases how climate-related investments are delivering investment returns with impact.
Nagarajan mentioned the example of an investment in an aluminum smelter plant in one emerging market.
The plant runs completely on renewable energy through pump storage, and the subsequently “greener” aluminum produced is sold at a premium to multinational companies like Volkswagen.
“In the value chain, multinationals are willing to recognise and pay premiums for the green element of raw materials, as most have a mission towards green,” Nagarajan said.
QUESTIONING ESG STANDARDS
While ESG standards have become a mainstay among the majority of institutional investors and the investment industry as whole, there has been pushback and unfavorable sentiment against ESG.
At Dutch pension fund manager APG Asset Management, they have observed the anti-ESG sentiment spread from the US and parts of Europe.
Park Yoo-kyung, head of responsible investment and governance in Asia Pacific at APG Asset Management noticed how the anti-ESG wave has now hit Asia as well.
“Some companies delay ESG-related initiatives because of pressure or backlash pushback from some investors on why they do these initiatives,” Park said.
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She also said some companies prepare different answers on ESG depending on whether they are facing pro or anti-ESG investors. The rift among investors can also be seen in shareholder votings.
“I see that when we put forward shareholder proposal at an annual shareholders meeting asking about, let's say, labour safety. It should be s a no-brainer, but now some are mumbling or hesitating,” Park said.
A solution to this could be for the pro-ESG community in the investment industry to take a step back and make sure there are proofs of concept to push the ESG agenda and impact investment.
“This could be an opportunity to ask if we ran too fast and lost some along the way? Did we overpromise on ESG funds’ immediate ability to make money and outperform the market? If we don’t then don’t say so,” Park added.
Instead, the industry should focus on the issue of quality data for showcasing impact. A part of that is to lift the standard of reporting and avoid generic, superficial ESG reporting that just ticks the boxes.
“Some companies put out clearly machine written ESG reports of sub quality, and then no one reads it. Let’s not do that,” Park said.
Another issue Park observed is that regulators have become a strong driver of the ESG agenda over the past 18 months. Although positive, such regulations can also lead to a pushback.
“I think regulation is good, but if it is too descriptive, or too pushed for, then I think that this anti-ESG (sentiment) is possible. So let's keep that in mind and focus on the real impact,” Park said.
BII’s Nagarajan also recognised that regulators along with rating agencies and lenders are emphasizing more on ESG-related matters. He sees this as a positive for future business development.
“Building resilient businesses with strong ESG practices is core to the long term growth and economic development of many economies,” Nagarajan said.
He pointed out that climate-related issues cannot be ignored anywhere because it hits everyone. He mentioned the 2022 Pakistan floods that caused casualties as well as $14.9 billion worth of damage and $15.2 billion in economic losses, according to the World Bank.
“I have never seen rains there for the last 10 years, and last year, a third of the country was under water, for a nation that is not a part of the big emission emitting countries. But that's the fate of it, and there is no choice but to start thinking about it as investors,” Nagarajan said.