Australia’s second largest super fund has faulted hedge funds, limitations in third-party ESG reporting, and the lack of hiring diversity for hindering general ESG progress. 

“The hedge fund industry has been one of the more challenging sectors from an ESG integration perspective,” Liza McDonald, head of responsible investments at Aware Super, told AsianInvestor.

She said that in some cases, it was hard to assess whether there was an ESG strategy in place, how transparent the hedge fund was about ESG, and how it performed on stewardship. “Some of these factors are inherently difficult to assess, given the breadth of different hedge fund strategies that managers may be using,” she said.

“We acknowledge that some hedge funds are likely to be better placed to integrate a responsible investments policy than others"

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DIVERSITY CHALLENGE

McDonald also pointed to a bias towards female hires in the sector. “Our experience is that more females than males are currently attracted to ESG roles,” she said.

“We would like to see greater diversity in the candidate pool, like we would like to see in all areas of our organisation and in the companies we invest in,” she said.

The fund’s responsible investments team comprises seven staff, and McDonald said that competition for experienced ESG hires is increasing. “In terms of hiring ESG professionals, it’s an emerging field and the market for attracting the best people is very competitive. That’s a challenge for all asset managers,” she said.

In an October interview with AsianInvestor, Raphael Mertens, chief risk officer and head of ESG at Allianz Real Estate, noted the rarity of finding specific ESG experience in the property sector, notably in the form of acquisition and [building] management experts. 

McDonald said Aware Super was addressing stiff competition for ESG specialist hires by focusing on developing ESG skills of current staff through training and other professional development opportunities. Hiring cross-over between specialists and the rest of the fund ensures that ESG knowledge is disseminated and integrated.

“We are also pleased to have seen colleagues from other areas of our investment function join our responsible investments (RI) team, and [have] conversely seen some RI team members take up roles in the sector investment teams,” she said.

LOOKING FORWARD

McDonald pointed to the limits of current ESG measurement tools available from third parties, echoing similar comments from other investors to AsianInvestor now and in the past.

“We found most of the ESG data and scores available from other research providers are based on present or past company information,” she said. 

To combat the gap in more forward-looking metrics, the fund has incorporated them into its proprietary LVC score, which measures long-term value creation at ASX 200 companies.

While the score was developed to focus on long-term value creation rather than ESG impact per se, it considers social license, culture, management quality and discipline, and organisational resilience among other measures. McDonald says it serves a central role in investment decision making, comprising one of several inputs into the fund’s quantitative strategy.

McDonald said the fund was already sharing proprietary information on ESG measurement – namely its impact measurement framework – with peers in the industry.

REPORTING GAPS

Other investors have also complained about the paucity of ESG information, in Asia and beyond.

Alastair Hall, global head of investment strategy and partnerships at Omers Infrastructure in London, told AsianInvestor there was a paucity of ESG reporting, including around infrastructure investing. “Currently, there is a lack of rigorous ESG data from many businesses globally for investors to adequately inform investment decisions. In order to drive sustainable value for our members, we rely on the transparency and comparability of data,” he said.

Hall added that despite the limitations, Omers Infrastructure is forging ahead with allocations to Asia, where it sees considerable opportunities to pursue its energy transition investment theme.

In August, Dr Raphael Mertens, chief risk officer and head of ESG across Allianz Real Estate, told AsianInvestor that good data about the carbon emissions of buildings in Asia was hard to find. “[In Asia] we’re missing clear energy and carbon benchmarks, generally speaking,” he said. 

Fiona Mann, head of ESG and equities portfolio manager at LGIAsuper, said the delay in finding a single agreed model among international bodies for measuring climate change presented a challenge to developing more effective ESG practices. “It’s frustrating that we don’t have one framework for conducting scenario analysis,” she said. However, she noted that draft practice guidelines released by Australian regulator APRA in April on managing the financial risks of climate change, provided important guidance and also reinforced the importance of the issue amongst APRA-regulated bodies.

Meanwhile, AsianInvestor reported the results of an annual global survey of institutional investors and consultants by RBC Global Asset Management this September. It found that fewer Asian investors believed integrating ESG metrics in their portfolios led to better management of the risks, compared to the previous year. 

This article has been edited to remove a sentence on ethnic diversity of applicants to ESG.