Asian asset owners intensify their ESG embrace
Asian asset owners and fund managers say that environmental, social and governance (ESG) investment is advancing rapidly in 2020 and that Covid-19 has, if anything, boosted this activity.
“We are seeing even more evidence that ESG is being adopted within government-controlled assets, whether that’s through pension funds or sovereign wealth funds,” Gabriel Wilson-Otto, head of stewardship at BNP Paribas Asset Management in Hong Kong, told AsianInvestor.
As an ESG working group member within the Financial Services Development Council (FSDC), Wilson-Otto is helping to advise on developing Hong Kong as an ESG hub. In 2020, he has seen a sea change in the government’s focus.
“In early July, we published a paper on how to develop green finance eco-systems in Hong Kong. The interesting thing is that the paper has been acted on by the government before we even announced it publicly.
“So we are seeing a huge acceleration and dynamism with regards to ESG. It’s gone from a niche consideration to something that is being seen as a core competitive advantage for Hong Kong as a financial centre.”
The Hong Kong Monetary Authority (HKMA) confirmed to AsianInvestor that it now views all of its investment activity through an ESG lens.
“As an asset owner, the HKMA is attempting to lead by example on green finance, prioritising green and ESG investments at the Exchange Fund,” said a spokesperson.
In its role as a bank regulator, the HKMA has developed a common assessment framework, to promote sustainable banking. It launched its first government green bond of $1 billion in 2019 and plans to roll out more green bonds, amounting to $8 billion in the coming five years, the spokesperson added.
The central bank has previously told AsianInvestor that it increasingly sees all of its risks through an ESG perspective.
EFFECTS OF COVID
The global pandemic may also have had a positive effect on ESG investing. Jennifer Wu, global head of sustainable investing at JP Morgan Asset Management (JPMAM ), said their research showed the pandemic has increased momentum for sustainable investing, with nearly $10 billion of inflows globally to sustainable mutual funds in the first quarter (Q1) of this year.
And according to Morningstar data, ESG fund investment in Asia, excluding Ucits funds, grew 21% in the first quarter, despite market volatility.
Wu thinks the Covid crisis will ultimately accelerate the ESG agenda. Her colleague and Australia country head at JPM AM, Rachel Farrell, told AsianInvestor, “ remember three years ago, ESG was really only spoken about in Japan, Australia and New Zealand. Now I’m amazed at how institutional investors in Asia are focused on it.”
In 2019, the Principles for Responsible Investment (PRI) launched a guide entitled, ‘Active Ownership 2.0: The evolution stewardship urgently needs.’ The paper encouraged institutional investors to shift their stewardship efforts towards outcomes, including addressing broader systemic issues such as climate change, modern slavery, and corruption.
Björn De Smedt, an associate with Institutional Shareholder Services in Sydney, said, “This approach takes active ownership to a new level, encouraging collective efforts aimed at specific outcomes, rather than changes in process and activities or the narrow interests of individual holdings.”
In the most recent Responsible Investment Association of Australia (RIAA) benchmarking report (2019), 49% (28 out of 57) of RI funds incorporate formal engagement policies into their investment processes.
“The shift towards outcome-focused engagement has played out in recent months, with asset owners and investment managers facing increased scrutiny of their commitment to ESG integration,” said De Smedt.
In Australia, Ferrell estimates that half of all super funds at a member level now have specific ESG options, but adds “frankly, there’s very little money in those funds at this point. They tend to be more focused on impact, rather than just integrating ESG into the process”.
Super fund consultant Danyelle Guyatt explained that although Australian super funds are considered quite sophisticated in their approach to ESG, “companies and investors are on their training wheels here; they are still trying to figure it out.”
JAPAN REVISED ITS CODE
Although Japan has made great strides in terms of stewardship in recent years, there was no mention of sustainability or ESG in the previous version of the country's stewardship code.
One of the main purposes of the revised code, issued in April, was to address issues of sustainability including ESG factors. The new code redefines ‘stewardship responsibilities’ and explicitly instructs institutional investors to consider sustainability in the course of their constructive engagement with investee companies.
Alessia Falsarone, Pinebridge
Alessia Falsarone, head of sustainable investing at Pinebridge, told AsianInvestor that Japan, remains one of the world's top three markets for ESG investing, including Europe and the US.
Of the growth in Asia and the demand for new ESG investments, she said, “If we add the rapid growth of ESG-themed financial instruments such as green bonds, green loans, sustainability-linked asset backed securities, I see the market for ESG portfolio options continuing to grow at lightning speed in 2020 and beyond.”
Meanwhile a potential breakthrough may be imminent in Korea, if the National Pension Service bows to peer pressure by other major investors.
“Historically, the NPS hasn’t been very active in trying to influence the companies it invested in,” Wilson-Otto said.
NPS has faced criticism for its passive attitude toward the Korea Electric Power (Kepco), which recently decided to continue investing in the construction of coal-fired power plants in Indonesia. Korea’s Teachers’ Pension and Government Employees Pension System are committed to not investing in coal-fired power plants at all, Dutch pension fund APG has already divested and the Church of England pension fund is considering its position. But NPS has yet to take any measures.