Family offices taking ESG into their own hands as regulators play catch up
Asia Pacific regulators might be ramping up mandatory disclosures, but forward-thinking family offices, it seems, are already two steps ahead of them.
With a lack of standards persisting in Asia, family offices are paving their own way towards environmental, social and governance (ESG) investing, say experts, even as governments are rolling out consultation papers for climate-risk disclosures.
In August, the Hong Kong Securities and Futures Commission (SFC) released consultation conclusions for climate-related risk disclosures.
Fund managers with at least HK$8 billion ($1.03 billion) assets under management would be required to adopt climate-related risk management practices, such as the measurement of greenhouse gases, and the use of scenario analyses.
During the same month, the Singapore Exchange (SGX) released two consultation papers to improve its sustainability reporting regime, involving the adoption of recommendations by the global Task Force on Climate-related Financial Disclosures (TCFD).
DATA STRUGGLES
However, experts say investors continue to struggle to make sense of ESG data, in particular grappling with the “social” side of ESG, which remains sorely neglected by regulators.
“Not only is it difficult to find the numbers but also, if you find the data, it might not necessarily be very accurate,” she said.
The data is also provided in large spreadsheets that can be difficult for investors to make sense of, she added.
“The other part is the qualitative data about the firm. We rely on asset managers to invest on our behalf so we ask them about stewardship, shareholding rights, engagement,” she said.
In response to the growing ESG trend, Pau in April this year launched BlueOnion, a tool that aggregates ESG data on major funds.
The platform gives each fund an ESG rating and allows users to access details about funds. For instance, a fund that bills itself as a clean energy fund might reveal itself to have 48% of assets invested into fossil fuels, she said.
To complement the tool, the firm also holds an annual forum where parties, whom she refers to as gatekeepers, can question asset managers.
“We provide this platform to furnace our 100 gatekeepers, who are institutions, family offices and private banks, with the opportunity to meet the asset managers,” she said.
“Around 80-100 asset managers sign up and we can interrogate them and keep a scorecard where we vote on these managers. It brings asset managers and CIOs together and I think the gatekeepers learn as well.”
One portfolio manager at a single-family office told AsianInvestor that his firm had put ESG rules in place even before regulators took action, and that the consultation paper was unlikely to change the way they invest.
“We do not invest in gambling or tobacco, and our investments overseas such as in the EU and the UK follow their ESG rules, which are at a much higher standard than here,” the Hong Kong-based investor said.
ESG STRUGGLE
A common gripe by ESG investors is the lack of standards and benchmarks globally.
Pau, however, disagrees.
“I do not agree with the idea of standardisation across ESG ratings providers,” she said. “If you look at traditional ratings agencies, Moody’s, Fitch – one might give a company AA and another might give B. They all have their own methodologies.”
Liam Woods, head of business development for Asia Pacific at financial services firm Apex Group, believes that the lack of standards is one of the key challenges for ESG, however.
“It leads to a difficulty in understanding because there are many competing global standards which offer different viewpoints. The real problem is that you have no way of them being able to benchmark. And if you can't benchmark, you can't compare,” Woods told AsianInvestor.
“A lot of our clients, because they've been taking requests from the allocators in Asia, may need to provide different reporting formats, different data, different disclosures to different groups.
"So it's been seen as a problem, because it creates overheads,” he added.
A lack of talent and expertise also hampers fund managers attempts to integrate ESG.
In May, AsianInvestor reported that some fund managers might struggle because of a lack of internal expertise. In the case of smaller operators, asset managers may not have the resources to retrieve the data or hire third-party help.
“ESG is still a relatively new thing. So there aren't a huge amount of skills and expertise out there… I absolutely expect it to be a service provider-driven economy, because we can have ready-made tools and appliances that we'll be able to (use to) help with some of these disclosures,” he said.
READ ALSO: Asia Pacific in a 'war for talent' as demand for ESG skills surges
CLIMATE FOCUS
With Hong Kong’s new ESG regulations, Woods believes it’s a good start but “it’s the capital markets that will drive change in many ways. Because obviously, we're the ones with the flows of cash,” he said.
He adds that even though the consultation was largely based off TCFD standards, which are globally unified standards, there remains a gap in Hong Kong regulations.
“It’s just focused on environmental concerns; it’s just focused on climate risk. Which is only one piece of ESG. When you look at what's going to come down the line for folks in Asia and in Hong Kong, it's inevitable that it will go beyond the environmental concerns, and we'll start to see ESG more holistically.”
“When you look at the ‘E’, ‘S’ and the ‘G’, you can’t really break any of them out. It really should be one thing. [For instance] if you take environmental and social alone, you can’t have meaningful impact without governance. So I think you’re going to see a much broader set of regulations coming down the line.”
Look out for part 2 of this story that looks at family office ESG strategies next week.