When an institutional asset owner formulates a policy to integrate environmental, social and governance (ESG) principles into their investment portfolio, it soon becomes clear that it’s not something to be taken lightly. Attaining credibility as a responsible investor takes time and considerable resources.
The stakeholders of the investor are generally concerned that this new ESG policy is not coming at the expense of investment returns – especially in Asia. Equally, they want to know the policies being put into place are effective in holding invested companies to account. After all, there’s little point in spending time and resources to become a responsible investor, only to find out that the investment portfolio is full of companies with phoney ESG credentials.
ESG professionals call this greenwashing – the practice of companies making an unsubstantiated or misleading claim about the environmental benefits of their products or services.
Greenwashing can make a company appear to be more environmentally friendly than it really is. It’s a practice that is prevalent in many Asian listed companies.
“Any company which hires a consultant to write its ESG report and then publishes a report that contains page after page of consultant-speak, adds none of its own words to the document, and does not have the report reviewed and discussed by its board of directors, is probably more interested in marketing than the real issues,” said Jamie Allen, secretary general of the Asian Corporate Governance Association.
In more recent times there has been an increased pressure on Asian companies to demonstrate outcomes – a move from ‘tell us’ to ‘show us’. This is partly driven by an increase in the sophistication of the responsible investment community in the region, and also by a clearer linking of portfolio return outcomes with prominent ESG issues such as climate change.
“It’s definitely becoming harder for companies to get away with greenwashing. We are really seeing an awareness and a deepening of that conviction throughout the market,” said Katie Beith, a senior investment strategist in the responsible investment division of the New Zealand Superannuation Fund.
“There’s been quite a big move by Asian stock exchanges strengthening their listing requirements around ESG, and issuing guidance notes on the ‘comply or explain’ approach integral to stewardship codes being adopted across the region.”
Efforts to eliminate greenwashing varies across the region.
Traditionally, the embrace of ESG is seen as being strongest in Australia and Japan. Indeed, 2018 was the first year that Japanese institutional investors were required to disclose how they voted at annual general meetings. The aim of this was to name and shame those who vote contrary to their fiduciary responsibilities.
Hong Kong-based brokerage CLSA devoted a major report in September to analyse the voting behaviour of these investors following the rules change. The outcome was not encouraging. The report revealed that the vast majority of investors continued voting in line with company management, just as they had done for decades. Company executives are typically rewarded for short-term performance, so by rubber stamping their preferences, the investors were effectively voting against their own long-term investing interests.
As NZ Super’s CEO Matt Whineray told AsianInvestor, “Companies are encouraged by their shareholders and lenders to focus on short-term value. They are incentivised to trade off long-term growth for short-term success.”
In Australia, high-profile controversies resulting from the Hayne Royal Commission in 2018 reversed the long-held view that local companies had been managing their ESG risks well. Duncan Paterson, director of Corporate Analysis Enhanced Responsibility (CAER) based in Canberra, said the recent scandals have led responsible investment professionals to ask harder questions of companies.
Asset owners have seen an increasing volume of sustainability reporting material being published, which requires specialist teams to assess it in the context of their portfolios.
“Asset owners and managers need to invest in the right tools to ensure that they are prepared to answer the questions that are increasingly being asked by stakeholders,” said Paterson. “This includes having a team of dedicated ESG professionals, appropriate training and support from external experts who can aid in the process of sorting through the huge volumes of data.”
CAER has observed that asset owners are becoming increasingly aware of the need to be sensitive to greenwashing risks in their approaches.
At Christian Super in Sydney, senior portfolio manager Edwin Lo focuses on ESG performance measurements to maintain visibility of the ESG and impact benefits achieved of his portfolio’s investments.
“We intend to conduct rigorous both on-site and off-site ESG and impact audits to substantiate our views,” Lo told AsianInvestor.
By being thorough in its measurement policy, Lo said the fund should be able to determine whether its investments are able to fulfil pre-determined sustainable development goals (SDGs – a collection of 17 targets set by the United Nations General Assembly in 2015) and associated financial, environmental and social objectives.
He believes this approach also provides the fund with opportunities for further engagement, such as mapping out the carbon reduction footprint and rates of restoration of people from deprived backgrounds.
Another Sydney-based super called REST is also preparing to measure the carbon footprint of its equity portfolio. Brendan Casey, general manager, investments said, “We believe we’d be letting our members down if we simply sat back and watched events unfold. Our preferred approach is to actively engage with investment managers and advisers to make sure sustainability issues are properly factored into our investment process.”
The fund uses investment consultant JANA to monitor the performance and capability of all of its external investment managers. This includes questioning whether to retain companies that record poor or declining ESG scores from their regular reviews with the investment managers, said Casey.
This story was adapted from a feature that originally appeared in the Spring 2019 edition of AsianInvestor.