Asset owners slowly embrace ESG strategies
On August 26 Singapore’s citizens awoke to a disconcertingly familiar sight: their pristine city was wreathed in smog.
The haze was a byproduct of brush burning in neighbouring Indonesia, where farmers illegally raze down acres of forest foliage to extend palm oil and pulpwood plantations.
It offered a choking example of the sort of environmental concerns that have helped raise environmental, social and corporate governance (ESG) considerations with asset owners and fund managers across Asia.
ESG and socially responsible investing (SRI) have been around for well over a decade, yet until recently few regional asset owners outside Australia factored the concepts into their investing processes.
GPIF makes ESG moves
That’s now changing. Japan, and particularly its $1.2 trillion Government Pension Investment Fund (GPIF), is leading the way. In November the world’s largest retirement fund became a signatory of United Nations Principles for Responsible Investment (UN PRI), the global agency that promotes ESG principles. And in July this year GPIF unveiled plans for a global ESG platform.
Other major asset owners are making moves in this direction, including Korea’s National Pension Service (NPS), the world’s third-largest retirement scheme, and Taiwan’s Bureau of Labor Funds (BLF). The latter oversees $103 billion in assets, and is seen by fund managers as being particularly proactive in this space.
“We began inviting consultants and asset management companies to share their practical experience on how to implement SRI-related mandates this year,” a spokesman for BLF told AsianInvestor in emailed answers to questions. “We are processing the mandate now.”
It’s not just asset owners pushing the boundaries; so are stock exchanges and regulators. Hong Kong’s stock exchange, Singapore Exchange and Bursa Malaysia have added ESG standards into their listing rules over the past year as they seek to promote responsible behaviour among listed companies.
Meanwhile, the Tokyo Stock Exchange recently launched an ESG-focused index in conjunction with Standard & Poor’s, called the S&P/Topix 150 ESG Index.
Additionally, the securities regulators of Hong Kong, Japan, Malaysia and Taiwan have each announced stewardship codes.
From small acorns...
Yet despite such activity, Asia represents a tiny proportion of ESG-related investments.
The Global Sustainable Investment Alliance (GSIA) estimated that assets in sustainable investments (or invested in an ESG-friendly manner) reached $21.4 trillion at the start of 2014. “But 99% of that figure was from Europe and America,” said Mamadou-Abou Sarr, global head of ESG investing at Northern Trust Asset Management.
The nascence of ESG in Asia is reflected by the region's relative lack of signatories to UN PRI’s six core principles. Globally some 1,600 companies have signed up. Just 38 are based in Asia ex-Japan.
“ESG is still largely in its infancy in Asia,” Fiona Reynolds, managing director for UN PRI, told AsianInvestor. “There’s an understanding of CSR (corporate and social responsibility) and that has been a focus, but I don’t think that in terms of responsible investment and incorporating ESG factors it has fully permeated [with asset owners].”
Asia’s outliers
The rationale behind ESG is simple: investors identify and focus on organisations that make serious efforts to meet environmental, social and governance responsibilities.
Until last year, only Australia and Japan had embraced the concept. Many of the former’s superannuation funds were early signatories to UN PRI.
“Australia has built large pension funds that invest for the long term,” said Reynolds. “As a result they are very interested in governance, and have dialogue with companies about environmental issues in particular.”
Australia’s Future Fund is seen as one of the most progressive in its thinking. Joel Posters, head of ESG risk management at the $88.55 billion sovereign wealth fund, joined two years ago to hone its strategy.
“At any level we need to be comfortable with the capacity of our investment managers, and clearly ESG is relevant to all our relationships,” he told AsianInvestor. “Fund managers know they can win mandates on the margins based on their approach to ESG.'
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CHINA'S MIXED ATTITUDE One major Asian nation has yet to firmly commit to ESG investing: China. The country isn’t entirely ignoring the concepts. It put together a green study group to consider its multitude of environmental issues while chairing the G20 this year, while the Shanghai and Shenzhen stock exchanges have indicated their willingness to integrate broad ESG requirements. Yet as of today, progress towards ESG investing remains slow, with no major asset owners signing up to ESG strategies. This may be partly cultural. “From what I understand the concept of fiduciary duty does not exist in China in the same way it does in other countries,” said Fiona Reynolds, CEO of UN PRI. Part of the problem lies in the fact that so many of China’s major companies are state-owned enterprises, which are prone to inscrutability, corruption and ignoring minority shareholder rights. In July 2015 MSCI, a US index provider, described in a report how China had ignored ESG risks that had grown to threaten its sustainable economic growth. There are some development moves in China that, while not directly linked to asset owner behaviour, are complimentary. One example is the rapid increase in green bond issuance, with China accounting for the most such deals so far in 2016. Another worthwhile endeavour being pursued is the creation of an emissions trading scheme. Over the past two years 16 Chinese provinces have partnered with California to pilot the market, which would be the largest of its type in the world. Both could be welcome and viable ESG investment options for asset owners increasingly keen to find them. |
Japan’s institutional investors began to take real notice of ESG in April 2014, after the Financial Services Agency launched a stewardship code, The Principles for Responsible Institutional Investors. The code was one of the ‘third arrow’ efforts of prime minister Shinzo Abe’s government to force companies to become more productive and transparent.
GPIF signed up to the code in early 2015, as have most other local pension funds, before becoming a UNPRI signatory. The pension fund declined to be interviewed by AsianInvestor, but industry experts said its signing up to UN PRI principles marked a real milestone.
“GPIF issued a research RFP [request for proposal] to consider how to implement stewardship and incorporate ESG, which we were selected to conduct, and it has recently further issued an RFP for ESG index mandates too,” said Arisa Kishigami, Tokyo-based head of ESG for Asia Pacific at index provider FTSE Russell.
Kishigami moved to Tokyo from London last year specifically because of rising interest in ESG among asset owners in Asia, and especially Japan.
Growing interest
Asset owners and fund managers outside Japan are also becoming more intrigued.
“Interest is increasingly dramatically in Asia,” noted Gaetan Obert, Paris-based head of sustainable and responsible investment at BNP Paribas Investment Partners. “There’s more interest inside and outside the company, and all our portfolio managers now know they need to integrate ESG into their processes.”
Korea’s NPS, the nation’s biggest asset owner, is acting as a trailblazer. In 2015 the Korean government amended the law overseeing the $459 billion fund, requiring it to take ESG factors into its investment processes or explain why it was not doing so. Peers such as the Government Employees Pension Service (GEPS) are also interested, but they say more support is needed.
“We consider ESG issues when we manage equity portfolios and have some social responsibility funds managed externally,” Park Chunsuk, head of GEPS’s investment strategy, told AsianInvestor. “However, since there is no available domestic ESG index so far in Korea, it’s quite difficult to implement ESG investments.”
In Taiwan, BLF has asked local fund managers to incorporate ESG factors into their investment procedures when bidding for mandates and is processing foreign fund managers for an ESG equity mandate, with a winner to be announced by year-end.
“We believe that ESG-related investments can enhance investment return in the long term,” the spokesman said, adding that BLF would increase its ESG positions annually.
Malaysia’s leading asset owners have also increasingly sought to implement ESG standards, in addition to sharia-compliant investing.
In late 2014 Kumpulan Wang Persaraan (Kwap), Malaysia’s second-largest pension fund, issued ESG and sharia-compliant portfolio mandates. Then in May this year the Employees’ Provident Fund, the country’s largest retirement pool, revealed plans to focus on SRI investing, at the same time as divesting from tobacco companies.
Progress on ESG-focused investing is inevitably slow, but moves are being made in the right direction.
This is the first of a two-part article on ESG, taken from the September 2016 edition of AsianInvestor magazine. Look out for part two shortly.