A version of this article was first published on FinanceAsia.

The Singapore-based investment team of global insurance company, AIA, believes that engagement is an effective tool to improve investees’ environmental, social and governance (ESG) practices. But Chunyen Liu (pictured), chief investment officer, shares that the firm will also consider divestment if companies fail to display progress.

“It’s through engagement that assets owners like us can exercise influence,” Liu told FinanceAsia.

AIA has a team of on-the-ground research analysts who regularly reach out to investees across all securities, to understand their progress across a range of ESG issues, Liu explained.

She added that due to the group’s size and its available resources, it is able to have “thousands” of ongoing conversations with market participants.

The insurance group has worked to cultivate a team of dedicated, in-house ESG specialists, who regularly engage with clients and investors to explore current investment themes.

The group started disclosing the results of this thematic engagement in its annual ESG report, the first of which was published in 2017. Topics explored include the investment impact of climate change considerations, how to procure sustainable palm oil and, more recently, the social impact and economic ramifications of Covid-19.

Divestment decision

Frequency of engagement is not the same across all investees, Liu shared. She explained that this is something that depends on the size of AIA’s stake in a particular company, and the significance and relevance of a topic or theme, to the firm.

While Liu believes that most companies want to progress over time and they take steps to do so; she explained that the AIA team will consider exiting projects, investments and partnerships as a measure of last resort, should a firm refuse to engage.

Asset owners are torn when it comes to use of divestment for recalcitrant companies. A common argument against divestment is that it may lead to another – possibly less conscious – investor, taking over the stake.

Singapore’s sovereign wealth fund articulated this on its insights page earlier this year: “GIC believes it is more constructive to engage and support companies in their transition towards sustainability, rather than adopt a blunt divestment approach.”

Liu explained that in unresolved cases where further action is necessary, the AIA team turns to internal expertise. “These are internally escalated to our Investment ESG advisory body, chaired by group CIO, Mark Konyn. They advise on potential options, including divestment,” she said.

Investment strategy

For its directly managed portfolio, AIA considers investment opportunities with the work of its ESG-focussed analysts in mind. The team incorporates ESG considerations into its fixed income and equities research reports, combining external ESG scores and research, with internal methodologies.

Liu explained that all companies under the group, including its internal asset management firm, AIA Investment Management, must abide by the same unified ESG policy.

As is the case among many within the investment community, AIA has developed an investment exclusion list that includes tobacco, cluster munition, coal mining and coal-fired power generation, in order to move the firm’s investment mandate towards being more environmentally and socially-conscious.

In March 2021, AIA committed to reducing its exposure to coal mining and coal-fired power generation in directly managed portfolios by the end of 2021 for equity, and by the end of 2028 for fixed income.

Equities account for 20%-30% of AIA Singapore’s portfolio, while its allocation to alternatives sits between 5%-15%, Liu shared.

For the externally managed portion of its portfolio, AIA Singapore takes an equally stringent approach.

“We hold external asset managers (EAMs) to the same degree of accountability as ourselves, so the due diligence and selection process is very thorough,” said Liu.

Liu declined to reveal the percentage of AIA Singapore’s portfolio that is externally managed, but said that it employs EAMs mainly for private investments and execution across its global (equity) strategies. She noted that the fixed income bucket however, is largely internally-managed.

In April 2021 AIA Group established a variable capital company (VCC) to enhance the private asset investment capability.

Disclosure challenges

Both a lack of disclosure requirement and a coherent taxonomy around ESG are problems bemoaned by all types of investor. As an Asia-headquartered international life insurance company, with much of its activity led by the region, AIA Group knows this problem only too well. “Disclosure availability in Asia is a huge issue,” Liu said.

The group tries to use its influence on investees, moving them towards international standards of disclosure and in Singapore, it is part of the Monetary Authority of Singapore’s Green Finance Industry Taskforce (GFIT), an industry body that works to standardise ESG taxonomy.

Among its recent efforts, the GFIT issued a guide for financial institutions on climate disclosure and a whitepaper on scaling green finance in the real estate, infrastructure, fund management and transition sectors.

The insurer also contributes to the wider, global effort, through groups such as the UN Principles of Responsible InvestmentClimate Action 100+ and UN Global Compact. In 2019, AIA became an adherent to the Task Force on Climate-related Financial Disclosures (TCFD) reporting and as a result, the group now discloses the weighted average carbon intensity of all issuers in its directly managed equity and fixed income portfolios.

“From 2018 until 2020, we reduced carbonisation in our portfolio by more than 20%,” Liu said.

The firm’s efforts contributed to the upgrade of its MSCI ESG score – an international benchmark that measures companies’ and securities’ resilience to ESG risks –  from BBB to A, last year.

Because private companies are usually not subject to the same disclosure regulations as listed firms, and the process of divestment can be fairly complex, investors here must carry out even more robust due diligence, experts previously told FA sister publication, AsianInvestor.

“There is probably a bigger problem in terms of availability of data with alternative investments”, Liu explained, but she added that on the other hand, involvement in the asset class enables investors to be more focussed and astute in their due diligence process, because general partners (GPs) serve relatively fewer investors and often come in with significant investment and ownership weight.

“There's no lower standard when it comes to private investments. We are committed to long term relationships with our partners, and we are focused on selecting GPs that are serious about sustainability.”

AIA Group's next ESG report will be published in March 2022.