Jacqueline Pang, head of ETF and indexing sales - Asia, HSBC Asset Management
How would you rate the levels of awareness around ESG based themes and investing in Asia?
Jacqueline Pang (JP): The overall awareness and adoption are certainly growing, but there is still a way to go compared to Europe and the US. While Asia has adopted ESG investment thinking that was pioneered primarily in Europe, it lacks the same degree of regulatory focus on ESG adoption as Europe and to a lesser extent the US.
There is a lack of available products in Asia to implement an ESG strategy — in particular, ESG ETFs which are a cost effective, transparent and liquid tool, also slowing down adoption towards a wider audience such as the retail segment.
What have been some of the roadblocks and how can they be surmounted?
JP: There’s a lack of standardisation of ESG data and disclosure as it is fragmented across Asia. There is a split between the so-called developed markets (DMs) in the region, and emerging ones that include the bulk of the countries.
The DM markets in Asia such as Singapore, Hong Kong, and Taiwan, are creating something comparable to European standards. Whereas in mainland China, while ESG disclosure has improved, it still lags the international markets. The lack of disclosures by companies is an impediment to a more significant uptake of ESG investment concepts and principles across Asia.
Lastly, the lack of disclosures in turn feeds into a lack of coverage from an ESG scoring perspective, which is the greatest challenge — applying a consistent screening methodology within and across countries. Lacking a unified set of rules across regions means inconsistencies that makes it difficult for investors to make an assessment. A larger number of Asia-based firms will need to disclose more data, with a greater frequency. Regulators have a part to play — introducing policies which are country or region specific.
In a key market like Hong Kong, how has the regulatory environment evolved to take cognisance of ESG-linked investment themes?
JP: Pension funds are the driving force for sustainable investments globally, having led the focus within domestic market across Europe, Japan, Australia, or the US. In Hong Kong, the Mandatory Provident Fund Schemes Authority (MPFA) is a strong advocate of sustainable investments.
On the regulatory side, the Securities and Futures Commission of Hong Kong (SFC) has published rules on ESG product labelling, outlining the reporting and disclosure requirements. There is now a recognition of Sustainable Finance Disclosure Regulation (SFDR), aligning on the use of funds to comply with SFC regulation, classified as Article 8 and 9.
This is particularly important for Asia. Being considered less mature, this recognition will promote transparency and address a key challenge for many Asian institutions, which restricts their ability to invest.
The MPFA recently announced sustainable investment principles basically establishing an industry ESG framework. This will open up to new products in particular ESG ETFs which can potentially shape the sustainable future for MPF members, to provide a cost-efficient solution. The MPF providers and trustees are working to prepare schemes for implementation.
On the asset management side, we see an increase in discussions on shifting from plain vanilla funds towards those with an ESG focus and the launch of new ESG-focused funds. On the regulatory side, we have seen an increase in approvals when it comes to sustainable ETFs making them an investment tool for MPF members.
This is relatively new — we have received an approval last year on a range of building blocks of HSBC Asset Management sustainable ETFs which provide investors access to the low carbon economy. A few weeks ago, the MPFA approved six of our MSCI Paris-aligned ETFs as index-tracking collective investment schemes (“ITCIS”) eligible. This provides a solution for investors who are looking to integrate Net Zero considerations to address climate risks. It’s encouraging from a manager’s perspective, for both MPF providers and members to have a wider range of ESG ETFs on the platform.
Several financial institutions in the region have started offering ESG themed ETFs, but naturally not all of these are created equal. What distinguishes an offering that's likely to deliver returns even as it adheres to performance indicators around ESG?
JP: Philosophically speaking investors should think about how their capital can be deployed to change the world for the better. Or have specific ESG goals, first and foremost, rather than focusing on whether they can beat a specific index by a few basis points.
Our belief is that over the long run ‘ESG aware’ investment strategies will help investors mitigate some of the risks associated with a wholesome move towards ethical investing. As the world takes ESG concepts more seriously, the regulatory, operational, and financial risks companies may face will get mitigated. This will naturally lead to outperformance in some instances.
Neverthless if the ESG focus is performance led, investors should opt for a screening process to remove underperforming stocks. But then, this results in the removal of securities, and creates a product that will be more heavily monitored, and ought to be balanced with a higher tracking error.
As issuers, our role is to build sustainable products and send signals to companies, since they are the ones making an actual impact. We know what companies care about: the cost of capital and funding, and whether they are receiving it on good terms. Our ability is to incorporate the right sustainable objectives, when building the product and to apply pressure on companies to adopt these policies.
Conversely, what are some of the red flags that an investor should watch out for?
JP: De-linking ESG investing and “outperformance” is the key for the first instance. Strategies and products that have been over-engineered to guarantee that they will outperform under all circumstances should be treated with caution. Where products and services only have a ‘light touch’ of ESG which makes very little difference in the real world or where screens are blindly applied for the sake of screening, investors should think carefully about the associated risks.
Investors ought to check whether their asset managers practice what they preach. It boils down to stewardship. Having experts experts examine how companies incorporate sustainability considerations in their business models is key to selecting companies or funds. Having experts that identify and engage with companies that have gaps in their sustainability agenda can make an enormous difference.
In this context, how do HSBC’s ETFs set themselves apart?
JP: HSBC Asset Management’s ESG ETF approach is to incentivise firms to change their practices for the better, rather than excluding them to ensure they continue to benefit from access to financing on reasonable terms. Through a tilting approach, firms with better ESG score will be overweighed and vice versa.
In advanced markets like the US, we have seen a surge in backlash against ESG investments. Why is this happening? Is it likely to catch on in Asia as well?
JP: Investors want to ensure that the products offered to them serve a purpose. Questions are asked about the effectiveness of ESG screening and its impact. Also, some products that reduce exposure to high carbon emitters, have underperformed this year, due to the rally we've seen in commodity prices.
This pause for reflection will ultimately be good for the ESG movement. There is less of this backlash in Asia, as ESG-based investing is less mainstream.
What are the factors both from a regulatory point of view as well as in terms of education and awareness, that will help create a significant surge a significant uptick in adoption?
JP: The main factor will be around domestic benefits from an environmental, social, and governance point of view. There is a positive feedback loop in terms of the welfare of states, associated with companies pursuing ESG criteria. So we would expect governments in Asia to embed ESG into their manifestos, as we have seen in mainland China which will naturally lead to more public awareness.
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