ESG alternatives raise a dilemma for Prudential Hong Kong
Prudential Hong Kong says a lack of established metrics to evaluate emerging ESG-focused alternative investments is making it think twice before committing capital to the segment.
The insurer identified shortfalls including a scarcity of traditional evaluation models such as measures of returns, yields, fees and risks to help better understand assets in the class.
“It doesn’t mean that we’d dismiss it – we just need a bit more time to look at it,” said Fanda Ho, Prudential Hong Kong’s head of investments, during a panel discussion at AsianInvestor’s recent Insurance Investment Briefing Hong Kong.
Ho oversees a portfolio worth $70 billion. Prudential is actively deploying capital into private markets as part of a long-term strategic asset allocation (SAA) plan.
Although Ho describes traditional alternative assets such as core plus properties as the company’s “bread and butter”, she said they also like to invest in new asset classes as potentially promising trends emerge.
She said such assets included private debt and ESG-focused investments, adding that if they could provide decent returns, Prudential is willing to take certain liquidity risks.
More specifically, Ho identified opportunities relating to nature-based environment and climate solutions, such as timber funds. However, given the many uncertainties in such emerging areas, she said Prudential faces a dilemma – not wanting to be a latecomer, yet also not wanting to commit capital to investments it didn’t have deep knowledge of.
As an example, she cited the carbon credit market, which she nevertheless described as an “exciting new area”.
“I’m sure there will be significant development in this area,” Ho said. “But the thing is, like a lot of new initiatives, it’s not just a handful of companies that can drive the market – it’s an industry thing. Saying that, all the asset owners and fund managers need to work together such that we can try to create a market.
“To me, it's not just ESG or non-ESG – it's that we target to incorporate that in the whole SAA. But obviously we need to acknowledge the different stages, development, maturity and sophistication across those asset classes,” she said.
“From an asset owner perspective, we always want something new. We’re always under pressure and [facing] competition to have a better return.”
MANAGING RISKS
To manage liquidity risks in the alternatives market, Ho said it is important to have a clear exit plan before committing capital.
“It’s not just the underlying fund manager, which obviously we need to know,” she said. “It’s also if we do need to exit, is there anything we could do?
“Alternatives are about commitment that deploys over the future either 4-5 [years] – or to private equities [which] would be longer, like over 10 years,” she said. “So, we need to work with our finance and other business teams on the forward-looking view of our portfolio such that we try to get the balance right on the commitment.”
Amid the current market downturn, Prudential Hong Kong’s alternative portfolio had shrunk, Ho said.
“Regardless, we still need to deploy our target exposure in the asset class,” she said. “What I can say is that all this market volatility, in terms of the deployment pace, it’s somewhat dampened a bit. But obviously there have been lots of projects that we’ve started. That’s what we’ll continue to do.”
Addressing the possibility of a recession, Ho said Prudential has dynamic rebalancing strategies to manage through any such circumstances.
“From a pure asset side, everyone would be worried about a recession. But from where we look at investment strategy, we also focus on how that would impact our overall capital solvency position,” she said.
Prudential has certain active strategies through which it would expect fund managers to take the possibility of a recession into account, but Ho didn’t give details of the company’s strategies.
She added that current market conditions would demonstrate the relative quality of fund managers.
“When the markets are going up, everyone’s doing well,” she said. “It’s only when the markets are not doing well, then you actually see whether that fund manager is capable.”