Asset owners face sustainable investing 2.0
The decision by United Nations’ Principles for Responsible Investment (PRI) to throw out five members for insufficient dedication to environmental, social and governance (ESG) principles on Monday (September 28) marks a new step in what could be the next chapter of sustainable investing.
Following the Paris Climate Agreement of 2015 and with evidence of climate change mounting, increasing numbers of fund managers and asset owners have sought to declare their desire to promote a sustainable agenda. Indeed, PRI says its signatories now represent a combined $100 trillion in assets (there is likely a lot of double counting in that sum, given that many fund manager signatories will manage some of the money of asset owner members, but it’s a substantial amount nonetheless).
This success is being replicated in the Asia Pacific too, at a slower rate. PRI has 321 asset manager signatories in the region and 79 asset owners, up from 318 (253 fund managers and 65 asset owners) in January 2019. And chief executive Fiona Reynolds told AsianInvestor in November 2019 that the agency had “barely scratched the surface” in the region.
But while PRI has grown, not all of its members have fervently practised what they signed. Reynolds also told AsianInvestor last year that the agency could soon, after a two-year window, remove organisations that had insufficiently introduced ESG principles into their investing standards. That is what it did yesterday. One of these organisations – Indonesia’s Corfina Capital – is Asia-based.
Further removals are likely – and should be welcomed. Combating climate change will require enormous changes, and those trying to carry them out deserve to be rewarded over those standing in the way. Fund managers and asset owners that greenwash, or falsely claim to take ESG investing seriously, deserve to be called out for their bad actions.
One factor that has limited some asset owners from properly committing to signing up to PRI has been the extra work that doing so entails.
In essence, members need to commit to directly investing in assets after considering them from an ESG perspective, or hiring external asset managers that will do so for them.
Some investors are reluctant to do so. A few feel that having to add such considerations is time consuming, costs money, and that adding such measurements risk reducing their universe of investable assets – which could hurt their primary fiduciary responsibility – maximising returns for their stakeholders.
Other excuses include the lack of standardisation in terms of assessing ESG and carbon emission data, insufficient amounts of ESG-specific investment tools, and insufficient top-down regulatory pressure for all players to introduce such norms.
PERFORMANCE AND CLARITY
However, these excuses are beginning to wear thin.
In terms of performance, ESG funds have easily stood out over the past year. Between the beginning of January and the end of August, ESG funds in most asset classes outperformed conventional rivals by up to 20 percentage points, according to Trustnet.
Indeed, it could be argued that asset owners who are not adding an ESG perspective are failing in their fiduciary duty.
Progress is also being made in creating a solid set of universally accepted taxonomy of measuring standards around ESG. The European Union created a Technical Expert Group on sustainable finance (TEG), which in 2019 set out a taxonomy on voluntary standards for economic activities, plus green bond standards. Many Paris Agreement signatories now believe these sort of standards need to be put into binding regulation.
And on September 23, the big four accounting firms unveiled a set of ESG climate metrics for international ESG reporting. These aim "to align the existing standards to enable companies to collectively report nonfinancial disclosures".
In addition, Oxford University on Tuesday (September 29) announced the Oxford Offsetting Principles, a new set of standards for carbon offsetting, in a bid to replace the patchwork of standards around offsetting today. The new principles aim to ensure state and corporate organisations live up to their responsibilities in limiting the amount of greenhouse gasses they are responsible for emitting.
“Financial institutions can also assess the plans of investees and borrowers. This can inform risk and impact analysis, as well as engagement and stewardship activities,” Ben Caldecott, Lombard Odier's associate professor of sustainable finance and COP26 strategy adviser for finance, told Reuters.
New types of investment instrument are also arising, broadening the options for dedicated asset owners. On September 14, Bank of China’s Macau office launched the first blue bond issue from Asia Pacific, a two-tranche $500 million and Rmb3 billion ($439.57 million) deal that will use proceeds to support marine financing and water sanitation projects. It said sovereign wealth funds and pension funds took 20% of the bonds, with insurers buying a further 5%.
This followed several social bonds, or deals supporting projects designed to improve corporate employee working standards. And further such deals are likely, as more lenders seek to promote green, blue or social bonds.
Meanwhile, asset owners are seeking ESG-friendly investments in the infrastructure space, looking to find renewable energy or carbon-friendly transport networks into which they can invest. Plus there is likely to be more progress made in private equity and indeed all asset classes, as asset owners come under pressure to instill ESG standards into every investment decision they make in the coming few years.
Combating climate change requires enormous dedication, but doing so is becoming easier, and it can also offer investment rewards. However, those investors in Asia and beyond that have yet to embrace ESG seriously have a choice to make: either become active supporters of companies and state actors taking climate change seriously; or choose not to do so and risk the embarrassment of being called out as a bad actor – either by PRI or, increasingly, activist investors.