Embedding environmental, social and government (ESG) commitments into a country’s entire investment community is no easy task. Taiwan’s not there yet. However, it’s moving faster than many within its peer group.
Some of the island’s big institutional investors are taking the lead, offering dedicated ESG investment mandates on external asset managers and speaking with companies directly to influence their behaviour.
Likewise, regulators are striving to advance the agenda. The Financial Supervisory Commission (FSC), Taiwan’s securities regulator, contributed to the launch of an ESG index by Taiwan Index Plus and FTSE Russell in December 2017, while introducing other ESG-related rules. This is important; ESG proponents say the concept is most successful when it is regulation-led and enforced.
However, Taiwan has its own unique ESG challenges. The principles are poorly defined, which means companies and fund houses can more easily get away with greenwashing – the act of pretending to live up to environmental standards – the process.
The island’s experience in trying to introduce ESG offers a snapshot into broader challenges facing the principles and its advocates.
SETTING THE SCENE
Responsible investing doesn’t come naturally to most Asian investors and corporates, so the biggest proponents of ESG in the region have often been governments, regulators and international agencies. FSC has been doing its part, introducing a stewardship code in 2016 and following up with further progressive measures.
The regulator told AsianInvestor in an emailed answer to questions that it is increasing awareness of corporate and social responsibility among listed companies and is encouraging investors to make more ESG investments.
On example of this was when the FSC and some local legislators pushed for relevant ESG index products, which led to the launch of the FTSE4Good TIP Taiwan ESG Index in 2017. Importantly, the index gained the support of the Bureau of Labor Funds (BLF), the island’s NT$3.9 trillion ($127 billion) state pension fund.
BLF handed out the first-ever domestic ESG mandate to seven external managers last year. The five-year $1.4 billion mandate passively tracks the FTSE4Good TIP Taiwan ESG Index, which measures the performance of 69 constituent companies on the Taiwan Stock Exchange (TWSE) that meet the globally recognised ESG standards.
The FTSE4Good TIP Taiwan ESG Index returned 0.32% and the FTSE Taiwan Index returned 0.31% from mid-2015 to end of February, indicating that it largely performed at par with the benchmark index.
“As a retirement pension fund, BLF’s ESG investment can lead the trend in the society and raise awareness,” Tsay Feng-ching, director general of the pension fund, told AsianInvestor in early 2018.
While it’s difficult to assess how effective the mandate is on ESG developments, it does appear to be encouraging more products in this space.
Taiwan Index Plus is speaking with relevant units to study how to use listed companies’ corporate social responsibility (CSR) reports and other credible open sources to compile an index about labour rights – part of the ‘S’ of ESG. The index is expected to launch before June, a spokesman at Taiwan Index Plus, a wholly-owned subsidiary of TWSE, said.
Meanwhile, Yuanta Securities Investment Trust Company (SITC) gained a mandate from Taiwan Index Plus to use the sustainability index as the benchmark for a new exchange-traded fund (ETF). It is expected to be rolled out in the third quarter of this year. Others could follow, believes Tony Mo, deputy secretary at the Business Council for Sustainable Development (BCSD) in Taiwan.
Another prospective asset owner supporter is the Public Service Pension Fund (PSPF), a NT$561.1 billion state pension fund that serves the retirement needs of civil servants, teachers and military personnel. A PSPF official that oversees domestic investment told AsianInvestor the pension fund is positive about the launch of Yuanta’s ESG ETF, though it will study them before deciding whether to invest in it.
“ESG investment is a trend for the long term …We pay attention to new financial products in the market and follow more closely such products,” he said.
This story was adapted from a feature on Taiwan and efforts to raise ESG investing, which originally appeared in AsianInvestor Spring 2019.