The Covid-19 pandemic has put the brakes on Asian institutional investors’ already ponderous uptake of environmental, social and governance (ESG) investing as they place more emphasis on ensuring stable returns, according to leading consultants and lawyers in the region.
Discussions about ESG-friendly investment products or approaches have become extremely common in Asia with fund managers over the past two years. But the economic impact of the pandemic has led the region’s largest investors to de-emphasise its importance.
According to estimates from investment consultancy Mercer, the request for proposals (RFPs) among Asia asset owner clients that included ESG accounted for 70% of the total this year, up from 60% last year. However, the rate of growth has greatly slowed; in 2017 the proportion was 20%.
According to UBS, the assets of Asia Pacific-based ESG funds reached $62.8 billion by June 2020. The number of Asia based asset managers signing up the UN’s Principles for Responsible Investment (PRI) has increased from 104 in 2015 to 303 today.
A combination of greater market volatility and central banks slashing interest rates to minimal levels in response to the pandemic has forced their shift in priorities.
“The required yield for [the asset owners’] investment is a bigger issue than ESG,” said Janet Li, Asia wealth business leader at Mercer in Hong Kong.
Even sovereign pension funds, historically the most engaged ESG asset owners in Asia, have shifted their attention from sustainability investment goals to hitting their annual return targets.
“Today, sovereign pension funds biggest priority is yield; that has been top of the agenda since February,” Li told AsianInvestor.
She said that in Asia the majority of ESG allocations had gone into active equity funds allocating on a global, rather than a regional level, with some into passive equities and fixed income.
This extends beyond traditional institutional investors. Li said that conversations about ESG-linked products or mandates with family offices, traditionally the least engaged institutional segment in Asia when it comes to ESG, have stopped completely.
“Trying to protect their assets has been even more important than gains. In this sector, ESG is one of the things that go out the window.”
Kate Brett, who leads Mercer’s European responsible investment team in London, said that the only mandate searches for specific ESG-focused funds that Mercer had helped with this year in Asia had been for asset owners in Australia and New Zealand.
Li added that while clients were likely to return their focus to ESG when the distraction of Covid went away, when this happened would vary across types of clients and where they were based.
The fall in Asian asset owner demand mirrors a similar sharp slowdown in ESG manager searches in Europe, traditionally the most advanced regional market for sustainable investing.
The total value of Mercer manager searches on behalf of European asset owners for sustainability related strategies (excluding private markets) so far this year stands at $219 billion, less than one-third the $698 billion recorded over the whole of 2019. In 2019, $56 million of searches were directed to sustainable emerging market equity strategies and all $698 billion were directed to equity strategies.
Despite this year’s slowdown in European asset owner searches for ESG, Brett remains confident their long-term trend towards ESG adoption would continue.
“The market volatility [since March] doesn’t delay the strategic decision but delays implementations. [Asset owners] generally wouldn’t transition assets in a period of high volatility.”
TALKING NOT WALKING
Asian investors’ slowing interest in ESG investing this year stands in stark contrast to their declared commitment to the sector.
In a global survey in July by bfinance, none of the 78 Asia Pacific investors said that the Covid crisis would affect the way they considered ESG. Indeed, 39% said ESG would become more important as a result of Covid.
Jingjing Bai, an adviser for bfinance in Hong Kong, said that, with the exception of certain family office and charitable foundations, which have specific ESG requirements, most of bfinance’s Asian clients rely on managers’ own ESG guidelines.
“The financial investors I deal with don’t usually have a particularly heightened ESG requirement; most of the time they will defer to managers’ internal ESG rules.”
Additionally, Asia lags behind the shift of European asset owners towards an investment model that includes an element of ESG in all investment decision-making.
“It’s not that ESG comes into play on every deal. [Instead] there are specific deals for ESG. It’s pretty binary in that sense. The focus on ESG initiatives [is] applied in separate silos,” Spencer Park, a Hong Kong-based counsel at law firm Dechert, who specialises in Korean asset owners, told AsianInvestor.
He added that there had not been a shift towards ESG yet among his institutional clients or more widely. “Not particularly among Korean or Asian investors at this point. We haven’t seen it affect the work we do.”
The main exceptions to the faltering engagement with ESG this year are to be found among Asia’s largest sovereign asset owners.
Speaking to AsianInvestor last month to announce the tie up between Dutch pension fund APG and Korean state fund the National Pension Service, Ronald Wuijster, chairman of APG Asset Management agreed that the tie up better facilitated their efforts to include ESG criteria within their terms with managers.
“If we combine our forces, we will be better able to ensure certain conditions are included in a contract” he said, adding that that could lead to stronger governance rights.