Asia’s institutional investors are seen to be increasingly focusing on climate change and its potential effect on their portfolios, but remain well behind their European counterparts on this front, according to industry observers and recent research. Japan is a notable weak spot in the sense that it lags every other major pensions market.
The degree of focus on climate change is increasing in line with a broader awareness of environmental, social and governance (ESG) issues among institutional investors and wealthy individuals, said one Singapore-based investment consultant.
“I have one private equity client with funds that invest in Asia with a primary focus on China, India and Indonesia,” he told AsianInvestor. “From fund 3 onwards, major investors [with that firm] have required that the following five areas are considered when making investments: environmental, climate change, health and safety, business integrity and social issues.”
This trend was partially underlined by a report this month from the Asset Owners Disclosure Project (AODP). It said: “51% of asset owners are now taking some action in managing investment climate risk, which is a positive outcome.”
But AODP also pointed to some rather less positive findings. As much as $14.3 trillion is still being managed without any concern for how climate change will impact those portfolios, said AODP chief executive Julian Poulter.
The independent and non-profit body rates the world’s 500 biggest investors, with $38 trillion of assets under management, on how well they manage climate risk within their portfolios. The analysis is based on direct disclosures and publicly available information. It grades asset owners from AAA to D while those taking no action are rated X.
The number of ‘X-rated’ asset owners in the Global Climate 500 Index has grown from 232 (of the 500) in 2015 to 246. The 10 biggest X-rated funds, worth a total of $4.9 trillion, include China’s State Administration of Foreign Exchange (Safe), Hong Kong Monetary Authority (HKMA) and China Life. HKMA declined to comment, while the other two institutions did not respond to requests for comment.
Overall, European pension funds dominate the table, while Asian countries such as China, Malaysia and Singapore are lagging well behind. The UK’s $4 billion Environment Agency Pension Fund is the top-ranked asset owner, followed by Australia’s $7.1 billion Local Government Super (LGS).
Meanwhile, Japan ranks 25th, lagging every other major pensions market. The country has 26 institutions on the list, with total AUM of $4.9 trillion, but none are rated higher than D.
Two of Japan’s most prominent pension funds, the PFA and the Chikyoren (PFA for Local Government Officials), have regressed in their approach to climate change. Companies ignoring the problem altogether, in the view of AODP, included giant insurers Japan Post ($602 billion of AUM), Nippon Life ($437 billion) and Zenkyoren ($436 billion).
The $1.2 trillion Government Pension Investment Fund rose to a D rating from last year’s X rating because it has committed to taking ESG factors into account in its investments. “It has started asking its asset managers what they are doing to promote better behaviour in the companies it owns,” said Poulter
Japanese institutions whose approach to climate change improved in 2015 include insurer Tokio Marine and the Federation of National Public Service Personnel Mutual Aid Associations.
But overall, said Poulter, “asset owners in Japan have shown no leadership on climate change and are putting their members and clients at risk. This makes it significant that GPIF has taken the first step to protecting millions of Japanese pension holders from the risks of climate change. We hope it will send a signal to the market, which has been ignoring the issue for far too long.”
Some Australian asset owners are high on AODP’s list of global leaders, but it’s not all good news down under. While LGS is near the top and AustralianSuper is ranked seventh, the Future Fund has come in for criticism. In October last year, AODP accused the Future Fund of “partying like it’s 1999” in its continued adoption of fossil fuel-related investments.
The Future Fund’s current rating in the AODP 500 is C. The fund has defended its position by saying it has built a robust approach to managing ESG risks and opportunities.
Jessica Matthews, managing director at investment consultancy Cambridge Associates in San Francisco, told AsianInvestor: “We have witnessed a significant uptick in interest from our clients related to climate change, motivated by a desire to have an impact or from a fiduciary standpoint, recognising the need to protect the portfolio from associated risks; often both."
But she confirmed that Asia lags behind other regions: "There hasn't been as much traction among Asian clients as in US and Europe. There have been several inquiries, but not much activity has materialised yet."