AsianInvestor Insights: Asset owners wary of ESG premiums
Asian asset owners are showing some scepticism towards the performance gains from environmental, social, and corporate governance (ESG) factors in their investment decisions and strategies, according to a recent survey by AsianInvestor's investment intelligence data platform, Asset Owner Insights.
59% of the surveyed asset owners don’t think ESG investments will outperform non-ESG investments, Kebelyn Lee, research manager at AsianInvestor, explained.
“Among this group, most – 64% – think there will be no impact on performance, while the remaining 36% actually think ESG will lead to underperformance,” she added.
See the full ESG report here.
The remaining 41% of respondents expect ESG-related investments will outperform non-ESG investments. Half (50%) of this group believe their ESG investments will outperform by 3-5%.
These asset owners are also looking to either moderately or significantly increase their ESG exposure in the next 6-12 months, the survey showed.
“As for these 41% that think ESG investments will outperform non-ESG investments, half of them (50%) will increase their ESG allocation in the next five years,” Lee said.
ALSO READ: AsianInvestor Insights: Asset owners keen on higher ESG exposure
In Q4 2023, AsianInvestor’s Asset Owner Insights team surveyed 29 regional asset owners to learn about the key drivers and challenges they face as part of their ESG investment strategy.
Nearly half of the respondents (48%) are from insurance companies, with close to one-third (31%) are from single family offices and private wealth management.
Most respondents are based in Hong Kong (28%), Singapore (28%) and South Korea (10%). The total AUM of all survey respondents is $1.13 trillion.
LACKING PERFORMANCE
abrdn
The notion that ESG-related investments will underperform has merit in the track record in the past few years, according to Vivian Tang, head of institutional in Asia Pacific at abrdn.
This overall relative under-performance is driven by the macro headwinds such as looming global recession, inflationary pressures, rising interest rates, the ongoing geopolitical events and disruption to global energy supply.
“Some of the underperformance may have been as a result of the strong performance of traditional energy-related stocks, which many ESG funds don’t own. There may also have been a dampening effect on ESG related holdings as a result of the efforts in some markets to politicise ESG,” Tang told AsianInvestor.
Over 2022 and 2023, the high inflation and rates environment impacted the performances of ESG strategies that tend to favour growth. These ESG strategies underweighted energy and tech names, which outperformed during 2022 and 2023.
Invesco
However, climate and energy transition are longer-term secular trends with corresponding thematic alpha and financial risks across different sectors, Alexander Chan, head of ESG client strategy in Asia Pacific at Invesco, pointed out.
“Much of the financial impact will likely materialise as more carbon pricing policies are launched or expanded and as physical risks continue to rise. Investors should consider broader opportunities and risks that mitigation, adaptation and transition will bring to portfolios,” Chan told AsianInvestor.
LONG-TERM GAINS
The Asset Owner Insights survey also asked asset owners whether they are willing to pay a premium for ESG investing, including higher fees charged by fund managers or additional compliance costs incurred.
“Only 21% of survey respondents are willing to pay a premium of between 0% and 3% for ESG investing,” Lee said.
However, ESG can have a very positive effect on both corporate financial performance and on portfolios over the long run, said Tang.
Companies that are well-managed and consider long-term risks and opportunities around ESG issues have the potential to outperform over the long term.
“There is evidence across many time periods and regions, especially in emerging markets, that integrating ESG into the investment process, and investing in companies with better ESG scores, can add to performance,” Tang said.
At the same time, ESG integration can reduce portfolio risk across the full spectrum of markets and investment styles.
“Incorporating ESG criteria into portfolio construction may help to limit market risk,” Tang added.
For more information on our in-house research insights and for a demonstration of our asset owner intelligence platform, please reach out to Kebelyn Lee at [email protected] and Tim Cresner at [email protected].