0:00:01 - Speaker introductions 0:05:15 - Key opportunities in incorporating ESG within Asian fixed income portfolios 0:09:46 - Longer-term business drivers for ESG within asset management 0:17:27 - How to bridge data gaps and tackle ESG implementation challenges 0:24:32 - Chinese investors’ engagement of ESG 0:28:49 - Drivers of ESG investing in Asian fixed income 0:45:26 - Fostering more commitment to ESG within fixed income 0:50:37 - How to assess ESG funds 0:51:50 - How to better educate market players on ESG DISCUSSION HIGHLIGHTS ESG is gaining momentum in Asian fixed income portfolios – Asia’s relatively poor track record on sustainability – given high levels of carbon emissions, problems with water scarcity, ageing populations and governance issues from family-run businesses – represents an opportunity for investors to demand change via better disclosure, greater diversity and more independence on boards. ESG is becoming increasingly prevalent within the asset management industry as part of return-seeking investing and benchmark-focused portfolios. The next generation of financial professionals will see an increasing need for ESG to be part of investment portfolios. This will increase demand for ESG products. ESG has been developing in China over the past few years, although engaging with the large asset owners such as pension funds and insurance companies is challenging – for example, there is no mandatory ESG disclosure requirement for listed companies. Investors need to bridge data gaps and tackle ESG challenges as part of implementation – Despite the volume of ESG data, there is no standardised methodology to quantify many ESG factors given they are dynamic in nature and defined differently across countries and regions. There are also inconsistencies in reporting and disclosure, plus issues with transparency. For now, without a one-size-fits-all approach, investors must do their own bottom-up analysis combined with ESG evaluation for each company individually on their future impact and financial performance. To meet the challenge fixed income managers face in getting reliable data to assess each of the ‘E’, ‘S’ and ‘G’ risks at a corporate level, analysts are looking at fundamental data at the balance sheet level, not just at traditional financial metrics. An ever-clearer investment case for ESG is driving more demand for sustainable bond funds – As long as investors don’t sacrifice returns, then the broader benefits of investing in ESG creates a compelling reason to engage with sustainability. This involves looking at the ESG-related risks of every single issuer within all portfolios. This is partly to mitigate downside risk, as well as to drive growth in returns. Asset owners and asset managers need to collectively realise the value of ESG in Asian fixed income and start to invest more assets in a more sustainable way, as well as to educate corporates on the importance of ESG. It is still difficult to identify an ESG ‘premium’ in Asia when investing in bonds, even though this might happen on an individual basis. There is a need for caution when assessing ESG bond funds – As more ESG-related debt is issued in the market to finance sustainability initiatives – such as transition and SDG (Sustainable Development Goals) bonds – investors need to become more familiar with these instruments to differentiate them. For example, investors must be aware of greenwashing – while a green bond sounds like it might tick an ESG-compliant box, investors actually need to do the analysis to understand what the proceeds of the bond will be used for. There is a lack of regulation to ensure consistency of how proceeds of bond issuance are applied, for instance, compared with an issuer’s ‘use of proceeds’ declaration. KEY INSIGHTS On the longer-term business drivers for ESG within asset management… Boon Peng Ooi, Eastspring Investments “It is encouraging to see more governments across the region embrace the need for green financing and create an environment to incorporate ESG into the capital markets. This offers scope for these products to play a greater role in investor portfolios.” Jean de Kock, Mercer “In 2014, about 70% of our global fixed income portfolios were assigned our lowest ESG ratings. Today, this is down to around 40%, showing the growth in ESG integration within the asset management industry.” Todd Schubert, Bank of Singapore “A holistic approach to ESG is needed, beyond increasing returns and mitigating risks.” Luo Nan, UN Principles for Responsible Investment (PRI) “Chinese investors are starting to engage directly with private companies to collect relevant ESG data and educate them on these concepts.” On tackling hurdles for ESG within fixed income… Yong Hong Tan, Eastspring Investments “Issuers generally tell us they want to improve their ESG credentials. Often, the challenge is they are unsure how to do this, what data they need to report and how to communicate their ESG efforts to their stakeholders. As an investor, we can tell companies which ESG issues we are more focused on and concerned about, and what information we require to do an ESG evaluation.” Todd Schubert, Bank of Singapore “The key for data providers is to prove they can add value by knowing which of the datasets are important and how to assess companies based on the data.” Jean de Kock, Mercer “For asset managers to get data that is wide-ranging and detailed enough to understand potential ESG risks, credit and sovereign analysts are doing a lot more of the work in-house.” Luo Nan, UN Principles for Responsible Investment (PRI) “In China, there should be more incentives for companies to contribute towards the recently announced sustainability goals. Given the data challenge, regulators need to play a more active role.” On the investment case for ESG in fixed income portfolios… Yong Hong Tan, Eastspring Investments “A lot of studies show ESG-focused bond funds tend to be more resilient to downside risk, relative to conventional funds. In Asia, corporate governance risk is an important factor to assess, due to complex shareholding and organisational structures, opaque business models and limited information disclosure. By using ESG analysis to avoid companies that present these risks, investors can limit downside risks and potentially increase portfolio returns as well.” Boon Peng Ooi, Eastspring Investments “Research has shown that companies which are strong in ESG exhibit stronger financial performance.” On what investors should look for when implementing their ESG views… Todd Schubert, Bank of Singapore “As investors, we must demand disclosure and accountability to ensure proceeds are going to where they should be when investing in green, social and sustainability bonds.” Jean de Kock, Mercer “Investors need to ensure the managers assessing sustainability bonds have the credit analysis expertise and resources to understand these increasingly complex risks.” On further ESG education to boost its role in Asian fixed income portfolios… Boon Peng Ooi, Eastspring Investments “We can all contribute to an ecosystem of green finance. Authorities need to take the lead, with industry bodies and issuing banks aligned in promoting standardisation. When this happens, pricing of ESG-related bonds will become centralised and there will be a more sustainable marketplace for green bonds.”
0:00:01 - Speaker introductions 0:05:15 - Key opportunities in incorporating ESG within Asian fixed income portfolios 0:09:46 - Longer-term business drivers for ESG within asset management 0:17:27 - How to bridge data gaps and tackle ESG implementation challenges 0:24:32 - Chinese investors’ engagement of ESG 0:28:49 - Drivers of ESG investing in Asian fixed income 0:45:26 - Fostering more commitment to ESG within fixed income 0:50:37 - How to assess ESG funds 0:51:50 - How to better educate market players on ESG
DISCUSSION HIGHLIGHTS
ESG is gaining momentum in Asian fixed income portfolios –
Investors need to bridge data gaps and tackle ESG challenges as part of implementation –
An ever-clearer investment case for ESG is driving more demand for sustainable bond funds –
There is a need for caution when assessing ESG bond funds –
KEY INSIGHTS
On the longer-term business drivers for ESG within asset management…
Boon Peng Ooi, Eastspring Investments “It is encouraging to see more governments across the region embrace the need for green financing and create an environment to incorporate ESG into the capital markets. This offers scope for these products to play a greater role in investor portfolios.”
Jean de Kock, Mercer “In 2014, about 70% of our global fixed income portfolios were assigned our lowest ESG ratings. Today, this is down to around 40%, showing the growth in ESG integration within the asset management industry.”
Todd Schubert, Bank of Singapore “A holistic approach to ESG is needed, beyond increasing returns and mitigating risks.”
Luo Nan, UN Principles for Responsible Investment (PRI) “Chinese investors are starting to engage directly with private companies to collect relevant ESG data and educate them on these concepts.”
On tackling hurdles for ESG within fixed income…
Yong Hong Tan, Eastspring Investments “Issuers generally tell us they want to improve their ESG credentials. Often, the challenge is they are unsure how to do this, what data they need to report and how to communicate their ESG efforts to their stakeholders. As an investor, we can tell companies which ESG issues we are more focused on and concerned about, and what information we require to do an ESG evaluation.”
Todd Schubert, Bank of Singapore “The key for data providers is to prove they can add value by knowing which of the datasets are important and how to assess companies based on the data.”
Jean de Kock, Mercer “For asset managers to get data that is wide-ranging and detailed enough to understand potential ESG risks, credit and sovereign analysts are doing a lot more of the work in-house.”
Luo Nan, UN Principles for Responsible Investment (PRI) “In China, there should be more incentives for companies to contribute towards the recently announced sustainability goals. Given the data challenge, regulators need to play a more active role.”
On the investment case for ESG in fixed income portfolios… Yong Hong Tan, Eastspring Investments “A lot of studies show ESG-focused bond funds tend to be more resilient to downside risk, relative to conventional funds. In Asia, corporate governance risk is an important factor to assess, due to complex shareholding and organisational structures, opaque business models and limited information disclosure. By using ESG analysis to avoid companies that present these risks, investors can limit downside risks and potentially increase portfolio returns as well.”
Boon Peng Ooi, Eastspring Investments “Research has shown that companies which are strong in ESG exhibit stronger financial performance.”
On what investors should look for when implementing their ESG views…
Todd Schubert, Bank of Singapore “As investors, we must demand disclosure and accountability to ensure proceeds are going to where they should be when investing in green, social and sustainability bonds.”
Jean de Kock, Mercer “Investors need to ensure the managers assessing sustainability bonds have the credit analysis expertise and resources to understand these increasingly complex risks.”
On further ESG education to boost its role in Asian fixed income portfolios…
Boon Peng Ooi, Eastspring Investments “We can all contribute to an ecosystem of green finance. Authorities need to take the lead, with industry bodies and issuing banks aligned in promoting standardisation. When this happens, pricing of ESG-related bonds will become centralised and there will be a more sustainable marketplace for green bonds.”
