Only 20% of asset owners in Asia have committed to a specific portfolio decarbonisation target, including public commitments or internal guidelines, a recent survey has found.
The lack of disclosure, plus concerns over potential negative impact on performance, are keeping Asian asset owners from committing to a decarbonisation target.
On the plus side, from the 80% of asset owners that have yet to introduce a decarbonisation target, 70% of them told the State Street Global Advisors' environmental, social, and governance (ESG) report released in November that they will introduce one within the next three years.
“Committing publicly to a number gives you an ambition to move towards. If you want to hit Paris alignment, that is what [net zero by 2050] looks like. If one doesn’t have a target, you can still measure where you are, but it’s difficult to know where you’re getting to and how to plan,” David Vickers, chief investment officer of Brunel Pension Partnership, told the survey.
“I think we’ve moved past the point of just having funds that are run with an ESG overlay, because that can mean, under some definitions, that you still end up with a lot of carbon-intensive industries as long as they’re valued appropriately based on analysis of the ‘E’ risk,” he said.
The State Street ESG report surveyed more than 300 asset owners globally in mid 2021, including about 60 asset owners in Asia Pacific (Apac).
According to the report, data quality and concerns about performance remained the key barriers for asset owners to commit to decarbonisation targets. Uncertainty around which frameworks to follow and the lack of clarity over regulations were also challenges.
The absence of international standards on ESG reporting and disclosure requirements creates obstacles for asset owners trying to set a concrete decarbonisation target, noted Karen Wong, global head of ESG and sustainable investing at State Street Global Advisors.
Asset owners also have concerns that the decarbonisation of their portfolio might make investments deviate from benchmarks, which can lead to higher tracking error and a negative impact on performance, Wong noted.
Moreover, decarbonisation is still a new concept, with a lack of historical performance data that people can look back on during different economic cycles, she added.
Many Asian life insurers have myriad near-term business focuses and challenges that have higher priority than ESG, noted Max Davies, insurance strategist at Wellington Management.
“One [challenge] is that they need to extend the duration of their assets to match long duration liabilities. They're trying to work out how to do that as their businesses grow, probably faster than domestic capital markets, so they're struggling to find long duration assets,” Davies said.
Another challenge is the introduction of different risk-based capital regimes in many Asian markets, such as Korea, Japan, and Hong Kong, as well as the change in international accounting rules for insurers under IFRS 17.
“The changes mean that the whole business has to think differently about the investment function and how they're set up,” Davies said. “ESG and climate risks are definitely part of the agenda, but they have perhaps received less oversight.”
As life insurers move closer to regulatory changes, there will be more focus on climate and ESG, Davies believed.
ESG challenges may surface not only in target-setting scenarios – greenwashing can also happen in the marketplace. According to a Bloomberg article in August, some green funds provided by large asset managers, including UBS and State Street, were found to be not fully aligned with goals set out in the Paris Agreement.
The research done by London-based nonprofit InfluenceMap highlighted the urgent need for consistency and clarity in the terminology used by funds, as well as for stronger regulation of sustainable funds.
In an interview with AsianInvestor that discussed ways to prevent greenwashing, State Street’s Wong said the asset manager doesn’t use green as a label, as it may cause confusion in the marketplace. She noted that there are certain guidelines in the Paris Agreement around green revenue, brown revenue, fossil fuel exposure, and carbon emissions exposure, which State Street will refer to.
“We have to spend time to make sure that investors understand what will be underpinning the investment strategy – not just by looking at the label itself, but what the non-financial objectives of the fund [are],” Wong said.
She also stressed the importance of consistency in international standards to avoid discrepancies in green labelling under different jurisdictions.