Hong Kong’s main retirement savings scheme is unlikely to embrace environmental, social and governance (ESG) investing principles until the average Hong Konger becomes more familiar with such themes and regulatory oversight becomes more flexible.

That's the feedback from some industry experts leading the city's ESG drive, underlining how Mandatory Provident Fund (MPF) plans lag institutional investment strategies when it comes to ESG investing in Asia, which as a whole is still catching up with other parts of the world in this area.

ESG is making some headway in the territory. BCT Financial Limited (BCTF) is among the first MPF providers to incorporate ESG elements when picking fund managers, according to the head of Asia institutional sales at a European fund manager. The company doesn't manage its own MPF fund but selects MPF products from seven fund managers and as of July 2017 had HK$150 billion under administration, serving over one million member accounts in Hong Kong.

But it is a relatively rarity. “[Investor] education is needed to raise awareness and influence [the popular] mindset, but we believe investment managers also have a role to play,” Lau Ka Shi, managing director and chief executive of BCT Group, told AsianInvestor. BCT is the parent company of BCTF. 

ESG investment, which seeks to invest in companies that as well as making money have a benign social or environmental purpose or are run on sound ethical principles, has a low profile in Asia, despite a growing awareness of climate change, pollution, and the like.
 
According to Lau, professionally managed ESG assets in Asia ex Japan account for less than 1% of ESG investments globally.
 
That said, there is growing appetite for ESG-based investment strategies among institutional investors in the region, which is leading to greater product innovation and more investment opportunities in this space for high net worth (HNW) investors. Some institutional investors have even sought to add an ESG element to their smart beta allocations.

In Hong Kong the problem is that without greater investor awareness, an MPF launched on ESG lines risks not getting sufficient subscribers, pushing up a fund's expense ratio. For now, these sorts of funds are still a long way from being able to reach the critical mass needed, Lau said. 

And without that certainty it's unclear whether a MPF manager would get approval from the Mandatory Provident Fund Authority (MPFA) for such products, even though, as the regulator confirmed via email when asked by AsianInvestor, it has no specific restrictions against ESG investments.

As it is, the MPFA website shows there are already 469 MPF products in Hong Kong, of which 45% are mixed asset funds and 33% are equity funds. The rest include bond funds, conservative funds, guaranteed funds, and money market funds.

Others taking initiative

Except for Japan and Australia, Asia is still behind Europe and the US when it comes to integrating ESG into retirement savings investments, Sally Wong, CEO of Hong Kong Investment Funds Association (HKIFA), told AsianInvestor.

But change is happening, thanks to the efforts of asset owners and index providers, she said. 

Pension asset owners have been asking fund managers about ESG compliance when they do beauty parades. Fund managers, at the same time, have grown aware that having ESG investing can reduce reputational risk and support value proposition.

While BCT has not seen demand from MPF scheme members for ESG funds, the company does address ESG issues when it sends out requests for proposal and conducts its annual due diligence, Lau said.

“Questions on ESG and how the fund managers incorporate ESG factors would be asked, as a first step. ESG elements that we look at in our due diligence process includes whether investment research has [included] ESG initiatives and whether the firm has [an] in-house ESG team,” she said.

Little MPF innovation

Lau Ka Shi

The regulatory environment surrounding MPFs is also stifling innovation and making it harder to promote ESG investment more widely among ordinary Hong Kongers because it is difficult to have new types of funds on top of existing MPF products without having to provide a whole range of justifications to the MPFA.

The regulator is cautious about approving funds perceived to have higher risks, for example, such as emerging market funds, Lau said. Sector funds like healthcare funds are also deemed to have higher concentration risks and it does not welcome funds with new themes that have relatively higher management fees as well.

“MPFs are mandatory and people must have to choose from a basket of funds, whereas people can choose not to buy any retail fund, so the regulator tends to be more mindful in the MPF space,” she said.