POBA CIO questions correlation between ESG and returns
South Korea’s Public Officials Benefit Association (POBA) is putting much effort into incorporating environmental, social and governance (ESG) factors in its investment decisions, but the pension fund is struggling to establish objective guidelines and measuring tools to track the impact of that effort.
According to Huh Jang, POBA's chief investment officer, the implementation of ESG in decision-making has been a topic of much debate among asset owners from varying perspectives.
“The correlation between ESG and investment returns is not entirely clear and requires further study,” Huh told AsianInvestor.
Although POBA gathers information on ESG implementation from third-party consulting firms such as Mercer and Preqin, Huh still wants better and more standardised data on how, and how much, the pension fund can gain from a greater emphasis on ESG.
“[Third parties] provide outside expertise on ESG-related information, but I still question the comprehensiveness and accuracy of available ESG-related data in general,” Huh said.
His concerns are shared by other asset owners. For instance, the head of ESG at Netherlands-headquartered pension fund PME recently told AsianInvestor that the investment industry must shift from traditional ESG measures to a more impact-based approach if it is to make investment sustainable for the long term.
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Huh said ESG was a contentious issue these days, describing it as the buzzword most frequently used by both asset owners and the asset management industry.
CHALLENGES AND EARLY SUCCESSES
“It is not easy to implement ESG in investment decision-making processes. Personally, I think we're at an early stage in terms of implementation of an ESG scheme in our decision-making process,” he said of POBA’s efforts.
Regardless of data issues, POBA has committed to doing what it can to invest with an ESG mindset. In POBA’s investment policy statement, it defines ESG very theoretically and broadly when it comes to the investment decision-making process.
For starters, the pension fund has an ESG checklist when it selects external managers and considers becoming limited partners in commingled fund vehicles within alternatives investments. When POBA invests in alternative investments, such as infrastructure, it prefers the renewable energy sector.
“Also, when we invest in the overseas real estate market, we try to include affordable housing," Huh said. "We declare that we don’t invest in any kind of fossil fuel power plants. Furthermore, we have decided to expand our investment approach to consider ESG factors when investing in stocks starting from this year.”
When POBA conducts governance assessments on shareholder voting, it uses external advisory expertise, shaping its conclusion on inputs into each decision-related issue. Huh said that in instances of conflicting views, POBA followed the majority input among its advisers.
“Put all those efforts together, and we're just at an early stage of developing our decision-making process reflecting the ESG scheme,” Huh said.
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