Every institutional investor in the Asia-Pacific region already has or intends to hire an internal environmental, social and governance (ESG) expert in the next three years, and almost half are planning to hire two or more.
That is one of the key findings of a new State Street Global Advisors survey to be released on Wednesday (November 13), which underlines how these groups are looking build up their ability to invest according to ESG principles.
Ben Colton, head of the asset stewardship team for Asia Pacific at SSGA, told AsianInvestor that ESG investing has grown by over a third since the fund house’s 2017 report. It now covers over $30 trillion, or one quarter of the world’s professionally managed assets, according to the latest report, boosting demand for ESG experts among asset owners and fund managers alike.
Implementing ESG criteria and hiring ESG expertise is not proving easy, though. Indeed, 45% of Asia-Pacific investors said a constraint on internal resources was their top obstacle to incorporating ESG measures.
“Nearly half (48%) of Asia-Pacific institutional investors said they had no in-house specialist, and of the 52% that did around 87% had just one,” Colton said.
This was also a top global barrier to greater ESG adoption; 43% of investors cited this, second only to a lack of reliable ESG data or research (44%).
Asia Pacific’s asset owners appear determined to rectify their lack of resources. While all global respondents said they would appoint at least one internal expert within three years, 47% of those in this region intend to hire two or more, the highest percentage of the three regions.
“It’s a clear trend that investors in Asia Pacific have a lot of demand for more ESG resources,” Colton said.
FIDUCIARY AND MITIGATION
The study also revealed that the principle reasons for asset owners engaging with ESG vary across the three main regions of the US, Europe and Asia Pacific.
Across the globe, 46% of respondents pointed to fiduciary duty and regulation, respectively, as the top two drivers for adopting ESG principles. Colton said the former was mostly supported by US investors, while the latter was the top priority for European asset owners, which tend to have more top-down rules to follow when it comes to how they invest.
“What I found most interesting was the development of fiduciary duty, and how respondents view it,” Colton said. “The growth they feel comes more as a push factor that is leading to the adoption of ESG rather than a pull factor, in which they see doing so as a trade-off for returns; that is the biggest difference [between this study and the 2017 one] and an encouraging difference for us.”
The importance of ESG in fiduciary responsibilities has a strong Asia-Pacific proponent in the Government Pension Investment Fund of Japan. Chief investment officer Hiromichi Mizuno told the audience of the Hong Kong Investment Funds Association 13th annual conference on November 1 that failing to address ESG risks went against an asset owner’s fiduciary duty.
Despite GPIF’s advocacy, the Asia-Pacific respondents to SSGA’s survey were the least inclined to rank fiduciary duty as a primary factor for pursuing ESG. Instead, regional investors said mitigating ESG risks was their top reason to adopt the principles (at 47%; it ranked 44% overall), with risk mitigation second.
However, Colton argued the two are not too dissimilar.
“Mitigating ESG risks and fiduciary duties are connected, so I’m encouraged that investors in Asia-Pacific are looking at ESG from a risk perspective,” he said. “As more investors in Asia look at ESG from a risk-mitigation perspective and as more data becomes available, I think they will move risk into their portfolio’s fiduciary component.”
SCREENING VS INTEGRATION
The preferred type of investing approach taken for ESG also varied among the study’s regional respondents. Most Asia-Pacific asset owners prioritise a negative screening approach. This consists of eliminating sectors considered bad from an ESG perspective, such as weapons makers, and is broadly considered the most basic approach to ESG.
Colton said he believes more will likely migrate to a positive screening approach, which highlights the top-performing ESG companies, and they will eventually embrace ESG integration, which measures companies across multiple quantitative factors including a stated desire to improve ESG rankings.
“I would expect to see more ESG integration and more sophisticated and complex strategies that combine objectives, such as minimising exposure to certain industries or maximising certain [ESG] scores or multiple sectors,” he noted.
Additionally, while equity and fixed income are by far the most common asset spaces in which ESG is implemented, investors in Asia-Pacific say they would like to begin to bring ESG into the alternative asset spaces such as real estate, private equity and infrastructure.