Asset owners across the world consider climate change as the foremost investment focus for the coming years, but are struggling to benchmark themselves against peers and lack enough suitable investment products, according to a white paper by the World Economic Forum (WEF). 

The Trendsetters: Transformational Investment Practices of Advanced Investors report, created in collaboration with consultancy Mercer and chaired by Singapore’s GIC and released on Wednesday (March 24), surveyed 30 global asset owners representing some $3.4 trillion in total assets. It identified that their top investment trends included climate change, low and negative interest rates, and technological evolution.

Asia Pacific asset owners in particular said they were paying most attention to environmental, social and governance (ESG) issues, said Janet Li, wealth business leader for Asia at Mercer.

Janet Li, Mercer: Apac
instos focusing on ESG

“Aiming for net zero [carbon emissions] target is probably one of the topics that we have nowadays at every single client meeting [in Asia],” she told AsianInvestor. “It suggests that there's high demand in this space and that asset owners are calling for help.”

DIVERGENT STRATEGIES

The focus on environmental concerns in particular has gained traction with some asset owners. New Zealand Super, for example, is aiming to cut the carbon intensity of its portfolio and its ownership of fossil fuel reserves by 40% and 80% respectively by 2025

While asset owners respondents were collectively aware of climate risks, the level to which they were prepared to combat them varied. This has led to a variety of strategies and approaches across the board.

“When you go out and survey asset owners, and ask, 'what are you doing in relation to climate change for your portfolio?', many of them would not have a concrete idea,” Li said.

“Should they be investing in certain type of asset classes? Should they be going for liquid global equity investments? Or should they go private? And they are often more questions than answers, which is actually normal, because these global systemic risks are unfolding,” she added.

Indeed, various studies have found that most asset owners are placing increasing importance on ESG investments, but only a small proportion have a specific climate change framework in place. Some global sovereign wealth funds, such as Abu Dhabi's Mubabala and Cofides of Spain, are working with portfolio companies to improve their level of carbon disclosure.

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Another challenge facing asset owners is that they struggle to compare their ESG approach with their peers because of a lack of standardisation, peer benchmarks, and apple-to-apple strategies, the survey found. 

“First of all, the definition [of ESG] itself is very broad. Secondly, the implementation options can be wide as well,” Li said.

For example, in Asean countries ESG investments include Sharia (Islamic-friendly) investments, which do not exist in North Asia. And while the Government Pension Investment Fund of Japan has opted to invest in gender diversity through an index, other asset owners prefer to focus on funds that support women entrepreneurs.

Li agrees with respondents and ESG advocates that asset owners and fund managers need to agree on frames of reference and goals. This has long been a concern among the region's asset owners, as AsianInvestor has previously reported.

“By putting up a framework, it will be easier to frame the conversation,” Li said, “It doesn't mean that things will just converge to a single load or single module, but that at least you are talking in the same frequency and then we can communicate. If we can't talk in the same language and we can't communicate, it's hard to see convergence happening.”

MISSING PIECES

The survey also found that while asset owners were interested in ESG-related investments, they believe there to be a lack of investment products that meet their needs.

Some of the ESG-related investments they are considering allocating to included sustainable agriculture, women- and minority-owned organisations and managed funds, as well as green and blue bonds - which focus on environmental and water-related health, respectively.

ESG-related investments allocated to and under consideration by asset owners

Asset owners have not always made such investments because of “negative prior experiences, foreign exchange or political risk, or asset owner-specific restrictions against investing into certain countries”, according to the report.

One example is that respondents recognised that water risks materially affected various humanitarian issues such as health, world hunger and political stability. However, few viable projects are available that meet institutional investors’ risk-return requirements.

“Certainly [asset owners] face challenges on how to manage this risk in their portfolio every day. Many of these trends have to be invested in time for future return, so [they have to think about] how they can identify opportunities ahead of others,” Li said.

As long-term investors, asset owners also have to think about how they can tap future opportunities under their current investment framework, she added.