Asset owner ESG surveys paint mixed implementation picture

Two asset owner ESG surveys, released late last month, have both yielded broadly similar conclusions on the importance of investment strategies — but responses differed markedly when it came to ESG implementation.

A survey report by FTSE Russell named Asset Owners Widely Adopting Sustainable Investment found that 86% of asset owners globally were implementing sustainable investments. By contrast, only 29% of respondents in a Morningstar survey entitled Voice of the Asset Owner said that they were considering ESG issues for more than half of their assets under management (AUM).

Although almost nothing separated the two surveys as a barometer of market sentiment on ESG, the discrepancy between their findings on implementation vividly illustrates the persistent lack of clarity around sustainable investing — and most fundamentally, how to define it — despite its now-mainstream status.

Both Helena Fung, head of sustainable investment for Asia Pacific (APAC) at FTSE Russell, and Thomas Kuh, global head of ESG index strategy at Morningstar, chalked up the differences between the surveys’ headline results to a number of factors, including the specific way in which questions had been framed. But they emphasised that the surveys’ almost identical findings on asset owners’ attitudes to ESG demonstrated the fact that it had become a priority consideration.

“I’d be hard pressed to find a major asset owner now that isn’t comprehensively trying to  implement sustainability across its holdings,” Fung told AsianInvestor.

Kuh said the study — the first of its type conducted by Morningstar — would be carried out on an annual basis, noting that “ESG investing has finally afchieved a scale and influence that means it matters.”

ASIAN EQUATION

Fung said FTSE sustainability in APAC required a tailored approach, due to the region’s differing levels of economic development, policy priorities, and industrial ecosystem.

“We see ESG as being a key topic in markets like Malaysia and Japan, for example, but then we see a focus on transition in Australia, which obviously is a very carbon-intensive public market, so there's not one consistent theme,” she said. “If there’s anything to call out, I think there's a focus particularly from regulators, but then that also, I’d say, has an impact on the investor approach, which is really around… climate change to opportunities in the green economy.”

A survey published earlier this month found that institutional investors in APAC were lagging their counterparts in Europe and North America when it came to prioritising the integration of ESG for carbon reduction, climate strategies, and environment.

Hardik Shah, a Singapore-based ESG practice lead at US-headquartered asset manager GMO, characterised the stance of asset owners in the region as related to the degree of complexity of ESG rather than overall demand for ESG compliance.

“The level of core complexity varies from region to region,” he said. “I’d say European asset owners are probably the most demanding … then the US, and then Asia comes in third.”

Nevertheless, Shah pointed out that asset owners in APAC were not necessarily trampling on sustainability concerns in pursuit of profits.

“Gone are the days where people would argue around the usefulness of ESG integration per se, saying things like, ‘Am I doing this at the cost of returns?’ Those arguments are more or less done, even in Asia.”

Tomomi Shimada, lead APAC sustainable investing strategist at JP Morgan Asset Management, told AsianInvestor that she didn’t see Asia as lagging on ESG compared to the US.

“Those are two regions that are still in a transitional phase. I think [Asia] has the potential to quickly catch up with regions like Europe,” she said, adding that Japanese companies were in the vanguard when it came to its environmental disclosure and technology, despite having room to improve on social and governance issues such as diversity.

SHIFTING FOCUS

Differing levels of ESG engagement across jurisdictions and among investors are mirrored by shifting priorities within the ESG universe, but FTSE Russell’s global survey found that overall, investors’ emphasis on climate had decreased as their concerns over the social component of ESG had grown. According to the survey, the proportion of asset owners concerned with climate this year was 41%, down from 67% the previous year.

“Many asset owners have already established a basis for the integration of climate,” Fung said. “I don't think it suggests that climate is less important — it may suggest that climate is better established in terms of how it's being integrated and how those risks are being managed.”

Kuh shared that view, saying that following the Paris climate accord of 2015, climate had become almost a singular focus, but the balance had been restored amid the pandemic.

CLIMATE MATTERS

Shah said that the issue of climate was more challenging for investors in Asia, and in developing countries, in particular, than for those elsewhere.

“It's somewhat natural that Asian investors, [consisting] of emerging economies still very heavily dependent on fossil fuels, would be less keen on jumping on the divestment bandwagon — for various environmental but also societal reasons — than the developed world,” Shah said.

However, he noted that “what’s happened in the last couple of years, very clearly across the globe, is wide acceptance of ESG integration. That approach is largely becoming a baseline expectation from asset managers in different parts of the world.”

Kuh said that despite changing priorities — which in addition to Covid-19, have also been attributed to the Ukraine war and rising inflation — environment and climate concerns remained the primary focus of sustainable investment.

“We're hearing of the issues that matter to investors, and climate is at the top of the list, but a number of what I think of as climate-adjacent issues are also emerging, like biodiversity, sustainable food and agriculture, and things like that, and in the social context, this notion of the ‘just’ transition,” he said.

“If you care about these issues, as a sustainable investor, you're not going to want a climate fund over here, a biodiversity fund over here, and a social fund over there. The question is: How do you account for these different dimensions and factors in the context of a unified approach? I think that what's really emerging here, is a more holistic perspective.”