More Asian investors are searching for better ways to measure how and if their environmental, social and governance (ESG) investments are making a real impact — and the pandemic has only heightened the pressure on asset owners and asset managers to show results in this area.
In the past, investment managers rarely had to address social sustainability issues: the S in ESG has taken longer than the E to reach investment mainstream consciousness. In fact, only in the last decade have companies started to report their social metrics consistently.
“One reason is probably that social issues span a rather broad spectrum of factors: from consumer rights and product safety to worker rights and worker safety, including child labour and slave labour; to the wider community including inequality, social inclusion and financial inclusion issues, and finally political and geopolitical issues ranging from human rights to conflict minerals, bribery and corruption,” Markus Mueller, global head of the chief investment office for Deutsche Bank International Private Bank, told AsianInvestor.
“So far the middle initial of ESG investing has been neglected to the point where it has become the ugly duckling of the investment world,” he said.
Mueller believes a focus on social considerations is nothing less than an effort to put the human being at the centre of any economic activity, to preserve the welfare of all stakeholders with a vested interest.
“Business is going to mirror the evolution underway in society towards better collaboration and more widespread acknowledgment of the benefits of social factors for companies and investors alike. Applying the S in ESG to business and investment decisions leads to a change in business models, and enterprises that fail to adapt will find the going tougher,” said Mueller.
ESG investing in Southeast Asia, like in the rest of the world, is growing rapidly across a variety of asset classes – most notably public equities and credit, according to Lauran Halpin, portfolio manager of Templeton Global Climate Change Fund.
“This growth is being driven by improving country-level reporting standards as well as increased corporate receptivity to meaningful engagement with asset owners,” Halpin told AsianInvestor.
Materiality is key for asset owners examining the ESG attributes of a company for investment. What is important for the investment case of one company or industry might not be as critical for another, according to Halpin.
“For example, total carbon emissions and plans to reduce these emissions might be one of the most important considerations for a heavy emitter like an industrial company or an airline,” she said. “On the other hand, carbon emissions matter less when examining a naturally lower emitting company like a pharmaceutical producer, where social considerations such as programmes to improve access to medicines in underserved communities would have greater materiality to the investment case.”
Asset owners have to make a more qualitative assessment of social factors given it can be difficult to measure or quantify issues such as impact on communities or employee satisfaction and even more difficult to standardise measurement across industries or markets, said Halpin.
“It is extremely important for investors to conduct primary research into a potential investment’s social track record, reporting, and future targets — and compare this information to other companies in a given industry or market to generate a clearer picture of performance and areas for improvement,” she said.
“This primary analysis should be backed up by engagement with the company to gain further information and insight into its culture, plans for improvement, and how it views its place in society.”
MEASURING SOCIAL IMPACT
“Like ESG itself, the S could mean different things to different people. To us, key social factors include diversity, equity, and inclusion (DE&I), labour standards, modern slavery, product safety and quality, and community development,” said Xinting Jia, ESG investment strategist for Asia Pacific at State Street Global Advisors.
Asset owners have traditionally put governance first when discussing ESG issues with their investee companies, but both social and environmental issues are now featuring strongly in these engagements, Jia told AsianInvestor.
“Specifically related to social factors, poor social practices of investee companies not only affect long-term returns but also pose reputational risks to investors,” she said.
Despite asset owners becoming more interested in better measurement of the ‘S’ in ESG, they still need more help in spite of progress made.
“For example, asset owners are engaging with companies to improve gender diversity or screening out companies that fail to comply with the United Nations Global Compact Principles,” said Jia.
Asset owners are increasingly measuring the social impact of their investments in terms of how they align with the UN Sustainable Development Goals (UN SDGs) or the Task Force on Climate-related Financial Disclosures (TCFD) framework.
“For large asset owners or ‘universal owners’, often the focus on S is on engaging with companies to improve social practices of investee companies. Diversity, as research demonstrates, can help improve long-term value creation,” she said.