The ESG patchwork: How do Asian asset owners align strategy with international standards?
WIth more than 200 sets of standards for reporting environmental, social and governance (ESG) risks globally, insurers have their work cut out for them meeting compliance and at the same time identifying the right investment choices for their stakeholders.
At AsianInvestor’s Insurance Investment Briefing on June 29, insurance company leaders in Hong Kong discussed the balancing act they must perform to meet their own mandates within local ESG frameworks while complying with international standards.
“We've taken a very comprehensive and holistic approach to ESG considerations based on our belief in long-term sustainability,” said Medha Samant, regional director of investment management, equities and group investment at AIA Group.
At Hong Kong multinational insurance firm AIA, the ESG mission statement is about driving sustainable behaviour to achieve long-term financial outcomes, said Samant.
The ESG journey has been an “evolving process” for AIA, as the firm applies ESG considerations across the two largest asset classes — fixed income and equities. Like many other firms, AIA began first by excluding harmful industries.
As AIA’s portfolio carbon intensity fell, the insurer also began progressively increasing its investments in green bonds and turning to a strategy of higher engagement with its investee companies rather than divestment.
AIA also expects external managers to adopt and align their ESG selection criteria to the insurance firm’s own.
DATA DEFICIENCIES
A well-documented challenge in the evolving world of ESG is the lack of standardisation of data and disclosure.
To combat this challenge, AIA — like many organisations — has designed its own ESG scorecard which focuses on the integrity of a potential investee company’s business model and its aversion to ESG risk.
“We’ve also been leveraging technology such as artificial intelligence solutions, which help our analysts and our broad investment team, to identify red flags and filter down or even summarise investee companies’ sustainability reports, which often tend to be like 300 or 400 pages long, when you really need just a summary of the relevant information,” Samant said.
Samant said her team is alert to their investors' interest in ESG, and said that AIA’s stakeholder have been very supportive of its initiatives to date.
“With respect to our whole net zero commitment, as well as our ESG scoring methodology, we are now working with our group sustainability team in order to design the roadmap going forward and to align our framework with the SDG (sustainable development goals) targets and methodology,” she said.
“Overall stakeholders have been very collaborative, which has been an encouraging process so far. But it also means that there is continuous dialogue, engagement and the need for their inclusion in our decisions.”
CHALLENGE OF EMERGING MARKETS
As the panel of insurers operate across multiple regions and markets, they often face hurdles when it comes to aligning their ESG framework across different jurisdictions.
Calvin Yip, head of corporate finance, Asia at Manulife said that evaluating investments in emerging markets presents particularly unique challenges.
“Investment evaluations in the recent past have most certainly focused the most on the environmental impact aspect of ESG,” said Yip. “When comparing emerging markets with developed ones, the social and governance aspects definitely require a more prominent position.”
As an insurer, Manulife will typically look to invest in companies that have high quality of credit.
But while many of these companies can provide evidence of technical market support in their domestic market, Yip says it requires a lot of engagement to assess the integrity of the business model and the risks that might compromise it.
“I have many discussions with CFOs to really understand not just their business, but also their corporate governance, their business conduct, and also their commitment to transitions towards things like decarbonization,” he said.
At the same time, Yip’s team will also share its knowledge with the potential investee, to create a common ground and move the ESG agenda forward, while also meeting Manulife’s investment requirements.
“In some of the private debt transactions that we have worked on in emerging markets, we are able to actively dialogue with the issuers so that they would incorporate ESG structures and incorporate documentation clauses that would be more aligned with what we see in the international markets account,” he said.
“We will also often get support from multilateral agencies, where they share our goal in terms of developing the local capital markets, as well as decreasing the amount of dislocations from international investors to the local market, so having these structures that are more aligned with international standards certainly will help.”
There are also the usual challenges of operating in foreign markets such as implementing transparency.
“Cultural differences, language differences, also come into play. So I believe it is important that we have local expertise and precedents to guide us through this ESG journey,” he said.