A move by the world’s largest institutional investor to exclude four Asian firms from its allocations has highlighted the lack of regional progress in implementing ethical investments.
While Europe has taken the lead in rolling out environmental, social and governance (ESG) policies, Asian investors continue to lag behind.
Norges Bank Investment Management, Norway’s sovereign wealth fund, announced on Monday (August 17) that it had removed Malaysia’s IJM Corp and Genting as well as Korea’s Posco and Daewoo International Corp from its investment universe because of their links to the destruction of Indonesian rainforests.
But the $852 billion oil fund’s stance contrasts with the approach which some Asian institutional investors have been taking to ESG investments. One investment that has courted controversy is Singaporean sovereign wealth fund Temasek’s 51% stake in ST Engineering, a defence group which manufactures weapons such as land mines.
“Asian clients don’t really pay much attention to [ESG-compliant funds],” said a Hong Kong-based fund manager at a European fund house who declined to be named. “Europe has more companies that run ESG-type funds, suggesting that it is a more viable product there than in Asia.”
Another manager from a US fund house agreed, suggesting that awareness amongst its regional institutional clients remained low. “Right now, it’s not getting into the mandate or the investment objective from the client… it is not likely to be popular as at the end of the day the focus is on returns,” he said.
Index provider MSCI noted in a July report that Chinese companies could generally be more prone to corruption than companies from emerging markets. Meanwhile 63% of Chinese companies have a controlling shareholder, a much higher proportion than the average in developed and emerging markets.
Despite low ESG awareness, both fund managers do see Asian interest picking up, albeit from a low basis, with corporate governance in particular being focused on.
“Institutional clients will over time care more than in the past. They want money to be put in companies at least with better corporate governance and not appear in nasty news. Standards are definitely improving, but not on the same level as Europeans,” the European fund house manager noted.
Indeed, some Malaysian institutional investors already practise ethical investing through Islamic-based sharia policies, with controversial industries such as gambling and alcohol automatically filtered out from their universe, the US fund house manager noted.
But questions over ESG investment can become a slippery slope, with ethics differing from one culture to another. Industries barred under ESG may be seen in a different light around the world.
Likewise, there is a question over whether ethical investing can be seen in black and white terms. “Some companies may not invest in weapons companies out of ethics, but can they invest in Dow Chemical, General Dynamics or Airbus [all of which have applications for the military]?” the US fund manager said.
“I don’t want to take the moral high ground and say ‘oh casino is bad, gaming is bad, alcohol is bad’ – you can say that McDonald’s or Coca-Cola is bad as a source of diabetes. Where do you draw the line?
“Our mandate is to invest in stocks and if they get listed then the stock exchange as gatekeeper should implement ESG or the regulator should regulate ESG-related activity. If not, then these activities are legitimate and legal and fully compliant with any legal environment, so why can’t we invest in these companies?”