How asset owners are trying to make a bigger (ESG) impact

During the G7 summit hosted by the UK from June 11 to 13, the International Institute for Sustainable Development revealed a startling fact: the world’s richest nations continue to provide $190 billion of direct funding of oil, gas and coal a year. At the same time, they have been removing or downgrading some environmental standards. 

 

The revelation underlined just how entrenched fossil fuel industries are in the world, and how far there is to go in the drive to combat climate change. 

 

Activists are increasingly asking asset owners to play a bigger role. Many are doing so, embracing the ‘net zero’ asset managers’ initiative that seeks to cut global carbon emissions flat by 2050. They have begun analysing which assets are most exposed to climate risk and pushing their external managers to drill down further. 

 

“Stakeholder engagement is ramping up all over the world,” said Del Hart, head of external investments and partnerships at the New Zealand Super Fund. “Europe has been leading in this regard, so we have historically engaged in discussion with investors there such as PGGM in the Netherlands. But in the US too, there is a lot more happening now.”

 

According to Mercer, more than 50 initiatives have now been established that seek to compel and support investor activity on climate change, whether focused on integration, stewardship, sustainability investment or screening. 

 

For example, 168 global asset managers and financial institutions managing more than $17 trillion in assets have signed up to support the Carbon Disclosure Project’s campaign to ensure that data on climate change, deforestation and water usage is properly reported by companies. 

 

More action is taking place in Asia too. “The volume of engagement between institutions and companies has significantly increased across the region,” according to a recent review by the Asian Corporate Governance Association (ACGA).

 

“Civil society groups are becoming more active, financial regulators continue to sharpen their enforcement tools and audit regulation is becoming more sophisticated and transparent.”

 

This growing activism is putting asset owners into the spotlight too. Increasingly, they are under pressure to demonstrate how their actions benefit society at large, via tangible metrics. 

 

IMPACT FOCUS

 

Some of Asia Pacific’s biggest investors appear increasingly eager to underline their dedication to combating climate change. 

 

For example, Australian companies do not have mandatory climate risk disclosures. So, the Australian Council of Superannuation Investors (ACSI), which represents Australia’s biggest superannuation funds, took the first step. It decreed that from 2022 its members will vote against the re-election of directors they believe have failed to manage climate risk appropriately.

 

Individually powerful asset owners elsewhere are also supporting new initiatives. Singapore’s GIC, for example, is part of a new investor-led engagement programme aimed at driving net zero emissions transition in Asian electric utilities by cutting emissions, strengthening disclosure, and improving governance of climate-related risks. 

 

The programme is co-ordinated by the Asia Investor Group on Climate Change (AIGCC) and will complement the global Climate Action 100+ initiative.

 

“Helping these companies reduce their emissions while strengthening their disclosure and governance standards will not only advance the sustainability agenda, but ultimately protect and enhance their long-term value,” said Liew Tzu Mi, chair of GIC’s Sustainability Committee.

 

The Monetary Authority of Singapore (MAS), which manages the country’s official foreign reserves, stated in June that it plans to integrate climate risks and opportunities into its investment framework, to support the transition of portfolio companies. 

 

MAS is also implementing a climate risk mitigation overlay, via benchmark customisation, for its equities portfolio and is considering excluding companies whose revenues are most at risk and least able to make a transition to a low-carbon economy.

 

The pressure of asset owners and fund managers on companies to be more transparent appears to be having an effect, judging by rising corporate complaints. For example, US major corporations such as technology companies Microsoft and Alphabet have moaned about calls for greater environmental, social and governance (ESG) disclosure. 

 

REGULATION REQUIRED

 

The effectiveness of ESG engagement depends on regulators forcing companies to reveal information in a systematic manner. 

 

As part of its recent review, the ACGA surveyed institutional investors to gain a better idea about their engagement on ESG issues. The survey revealed that disclosure regulation is becoming more stringent, but ground rules are quite superficially observed. 

 

“Few corporate governance codes of best practice in Asia address in any depth how board composition and governance might need to change to manage material ESG challenges, in particular climate change,” said ACGA secretary general Jamie Allen.

 

He notes that some Asian corporates are trying to better meet ESG requirements. A few, such as China Light & Power and CK Hutchison in Hong Kong and China Steel in Taiwan, have formed new sustainability committees at board and senior management level.

 

But it still only scratches the surface, Allen told AsianInvestor. Asset owners often struggle to gain meaningful insight from corporate ESG reporting. 

 

“Investors are asking the questions, but I would say that companies are not, by and large, answering those questions. After reading a standard GRI (Global Reporting Initiative)-style report, are investors any the wiser about a company’s climate change activity?”