Prudential plc, Singlife lay out key themes in sustainable investing
Transition finance is a critical element of Prudential's comprehensive strategy for sustainable investing in Southeast Asia, according to Liza Jansen, the life insurer's head of responsible investment.
Prudential
"Our purpose is to help people get the most out of life, and we see sustainable investing as core to that purpose," Jansen told the panel at AsianInvestor's 5th Insurance Investment Briefing in Singapore on September 3.
Achieving sustainability goals involves supporting companies on their journey towards more environmentally friendly practices, rather than simply avoiding those that do not currently meet established standards.
"We need to think about transition finance," Jansen said. "How do we finance companies to go from brown to green? Because if we only finance green, we're not going to make the change that we need."
Prudential's commitment to environmental, social, and governance (ESG) factors is longstanding, she said.
"We've had ESG integration for many years," she noted. "We've had an exclusion policy, which excludes coal companies generating more than 30% of their revenue from coal, controversial weapons, and tobacco."
Beyond exclusions, the life insurer employs a multi-faceted approach to promote and encourage positive change within its portfolio companies.
"We look at ESG factors in our investment process. We engage with companies on ESG issues. We vote our shares. We have a climate strategy," Jansen said.
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In emerging markets, where the challenges and opportunities of sustainable investing are particularly acute, Prudential focuses on guidance and engagement.
"In Asia, we have a lot of high-emitting sectors," Jansen explained. "We need to find ways to finance these sectors to transition."
"In emerging markets, we need to engage with these companies rather than divest. If we divest, somebody else will buy those assets, and they may not have the same sustainability objectives as us," she added.
Jansen also underlined the potential mismatch between current sustainable finance frameworks and the realities of Asian markets.
"A lot of the frameworks that are out there at the moment, like EU taxonomy and others, they're very much focused on developed markets," Jansen noted. "They're not necessarily fit for purpose for emerging markets."
“In emerging markets, it's more difficult. There's less disclosure, less transparency. But we see that as an opportunity to engage with companies and help them improve their practices."
BALANCED APPROACH
On the same panel, William Chow, investment officer at Singlife, said that his company is adopting an active approach to sustainable investing for private assets while employing a passive strategy for public assets, with a particular emphasis on balancing risks and opportunities.
Singlife
A majority of Singlife’s private asset exposure are sustainable investments in renewable energy and decarbonisation technology across its private equity, private debt and infrastructure equity assets.
"We're invested in areas such as renewable energy, sustainable infrastructure, and green bonds," Chow explained. "We see these as areas of opportunity for long-term sustainable returns."
Chow underscored the importance of thorough due diligence in sustainable investing.
On public assets, the challenge to implementing a passive approach is the selection of climate indices as benchmarks.
Chow highlighted the perils of selecting stringent indices that do not take account of transition finance which can lead to a large tracking error.
"This poses a risk to investment performance, and brings into question the fiduciary duty of an insurance firm. Singlife has adopted indices that balances between the need for carbon reduction and low tracking error to safeguard the interests of our clients," said Chow.
"We do not directly engage with companies, but rather partner with external managers with the expertise to help Singlife implement our stewardship activities which can include transition finance," he added.
Chow also highlighted some short-term challenges facing sustainable investing in the current market environment such as potential withdrawal of supportive sustainable policies by newly elected governments, pressured by the growing backlash on ESG.
"However, there are opportunities for offshore wind in Asia given that major cities are located along coastal areas, and renewable energy in general for Europe on heightened energy security since 2022," he said.
OVERCOMING HURDLES
Michael Ridley, executive director and head of fixed income sustainability and climate research at MSCI, shared his insights on the challenges of the net-zero transition and potential solutions during AsianInvestor’s panel discussion.
MSCI
Ridley agreed that transition finance is playing an ongoing critical role in achieving sustainability goals.
"Transition finance is absolutely crucial. We need to provide capital to companies that are committed to decarbonising their operations, but we also need to ensure that this transition is just and equitable," Ridley said.
Ridley identified several key issues to address the challenges in the net-zero transition.
"One of the biggest challenges is the lack of standardised metrics and reporting frameworks," he explained. "This makes it difficult for investors to accurately assess the sustainability performance of companies."
The need for supportive policy frameworks was another crucial point raised by all three panelists.
"We need governments to create clear, consistent policies that incentivise sustainable practices and penalise harmful ones," said Ridley. "Without this policy support, it will be much harder to achieve our net-zero goals."
Technological innovation was also a focal point in Ridley's discussion.
"Continued technological innovation is essential to drive the transition to a low-carbon economy. We need breakthroughs in areas like energy storage, carbon capture, and sustainable agriculture."
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Ridley also underscored the importance of addressing social issues alongside environmental concerns.
"We can't forget the 'S' in ESG," he warned. "The transition to a low-carbon economy will have significant social impacts, and we need to ensure that these are managed fairly and equitably."
"We need collaboration between governments, businesses, and investors," he said.
"We also need to invest in education and capacity building, particularly in emerging markets."
Despite the significant challenges, Ridley and the other panelists agreed that the opportunities outweigh the difficulties.
"With the right strategies and commitment, we can achieve our sustainability goals and create a more prosperous, equitable future for all."
William Chow's comments have been updated in this story.