ESG in Asia Pacific (Apac) is perceived by some investors as less developed than in more mature private capital markets in regions like Europe and North America — but there’s much promise in the continent’s developments on this particular front.
According to alternative investments data provider Preqin ESG Solutions data, currently the average transparency metric in Asia Pacific, at 4.7%, is much lower than in other regions, such as Europe (13.1%) and North America (8.4%).
Mathematically, the Preqin ESG Transparency metric indicates the percentage of ESG Core Data indicators that are publicly or privately disclosed. This offers an indication of the extent of disclosure around core ESG issues.
Robert Turnbull, head of asset management Asia and managing director at Swiss Re, points to ESG’s prominence in Europe, followed by the US. Asia appears to be lagging behind, but it is catching up.
Turnbull is also noticing the trend of a much wider definition of what people think of as ESG. These days, there is much less focus purely on the E (for Environmental) measures, for instance.
“A lot of people, particularly around Asia, are more focused on, say, UN Principles on Sustainability across their 17 different goals. That is more than just climate change; we are seeing it in terms of disclosures, shareholder story, how you want to position yourself to your investors to show how you are achieving those 17 different principles,” Turnbull said on stage at AsianInvestor’s Insurance Investment Briefing in Hong Kong on June 29.
This approach gives investors a much wider array of metrics, whether that’s around inclusion, living in old age, or gender equality.
“It gives you many more degrees of freedom in terms of how you want to look after your S and your G components while having a compelling shareholder story, much more than just, say, making it only about scope 1, scope 2 carbon emissions. That is a theme to watch out for,” Turnbull said.
NEED FOR INTEGRATION
To improve on ESG efforts, Asian investors would first need to decide on a framework and approach for how ESG is going to be incorporated into their investment decision-making, Jaimee To, sustainable investment consultant at advisory and asset management firm Mercer, told AsianInvestor.
This framework should include some considerations on whether external parties’ ESG ratings and data form the core of their ESG analysis. Naturally, greater resources would be needed if investors decide to build proprietary data systems.
“Even when external data sources are used, we typically see one to two dedicated hires to support ESG risk analysis, scorecards, and engagement efforts. Over time, the team will then be expanded to include hires at firm level, to support policy and ensure coordination,” To said.
The next step for larger asset owners and managers in Asia will be to take up the challenge of including and strengthening internal data capabilities. As these big players familiarise themselves with basic ESG ratings, data, and analysis, some will start the process of in-sourcing ESG data capabilities, eventually moving away from third-party ESG ratings to developing in-house data science models, tailored to handle and analyse ESG data internally.
“Eventually, all managers should take steps to further expand ESG capabilities into conventional work streams or asset class teams, and evolve into a more cohesive unit that seamlessly integrates ESG into work processes, in contrast to individual ESG teams working in silo,” To said.
HEDGE AGAINST VOLATILITY
Swiss Re moved to a fully ESG-compliant $130 billion portfolio in 2016. Historically, ESG-related assets have performed much better than the reinsurer’s traditional benchmarks, according to Turnbull.
“ESG has actually done relatively well in terms of reducing some of [the] volatility. ESG may continue to be a theme throughout this current cycle,” he said.
According to Shiuan Ting van Vuuren, chief investment officer of Sun Life International HuBS, ESG offers sustainability impact as well as a tool against times of volatility for the asset owner’s general portfolio mix.
“You need to adopt and think about ESG that is commensurate with your resources, company, and own balance sheet so it works for you. If you are a multinational company with armies of people, or you are a smaller family office with 10 people, you have very different ways of doing ESG, van Vuuren said on stage at AsianInvestor’s Insurance Investment Briefing in Hong Kong on June 29.
“It is worth looking at because there is data that shows how ESG can help over time and also with volatility. Although the recent six months have looked bad, I have seen data that shows ESG is actually doing what it is saying on the tin,” she said.