Companies and regulators can help investors identify investment opportunities better by producing higher-quality data and enforcing tougher disclosure standards, market observers said, as sustainable investment inflows rise and thematic investing targeted at areas such as climate change is set to push growth further.
Environmental, social and governance (ESG) funds now account for 10% of fund assets worldwide.
A record $649 billion poured into ESG-focused funds worldwide from the beginning of 2021 until November 30. This was a large increase from the $542 billion in the same period in 2020 and $285 billion in the same 11 months of 2019, according to latest Refinitiv Lipper data.
However, due to a lack of standards, investors have been left largely to their own devices to sieve out assets that may simply be slapping on an ESG label.
TARGETS & STANDARDS
“Instead of just pledging net zero, investees are urged to set solid science-based targets, to avoid credibility risk. However, poor data quality will remain a hurdle in the Asia Pacific region in ESG and sustainable finance, while regulators begin to ask for more granular data that prove an investment managers’ sustainability claims attached to a product or investment strategy,” according to Shelley Zhou, Capco’s Asia Pacific ESG lead.
Zhou also noted that climate change will likely be a focus for investors after last November’s COP26 ended with global agreements to accelerate action on climate change.
“With two-thirds of global emissions represented by Asia Pacific, climate change will be the main topic for investors but specifically regulators will be trying to address the greenwashing and transparency issues currently seen in the industry,” she added.
“The HKMA [Hong Kong Monetary Authority] and SFC [Securities and Futures Commission] are working on customised standards by adopting China-EU common ground taxonomy and tightening climate risk disclosure. The SGX [Singapore Exchange] mandates climate reporting and Singapore’s green plan also asks banks to create the sustainable finance framework on their own,” Zhou added.
However, many of these frameworks are still works in progress considering the relative newness of ESG and issues such as inconsistent data continue to persist.
"We need more consistent data all the way around, which is one place regulation can help. Regulators can also help address the 'free-rider' problem by creating a level playing field for all,” Meggin Thwing Eastman, head of ESG research EMEA at MSCI, told AsianInvestor.
"The world’s publicly listed companies are currently on a course for a 3 degrees Celsius temperature rise as a group. Businesses need to make the transition to put that on track for 1.5 degrees Celsius instead. Investors can help apply pressure here to regulators, via engagement as well as capital allocation decisions," she added.
Additionally, in a globalised world, comparing funds across jurisdictions can also be a problem since each regulator uses a different framework.
But regardless of which standard or framework fund managers use, they ultimately need to be transparent and quantifiable, Elsa Pau, family office advisor and founder of ESG data aggregator BlueOnion.
“Not everyone can satisfy Article Nine, which is a much higher standard. But if you claim that you are integrating ESG as a characteristic, you need to show your environmental-related characteristics, your social-related characteristics, and then you need to apply that materiality to the portfolio's nature,” she said.
This would apply whether you are adopting standards from the US or from the UK, not to mention other sources such as the Task Force on Climate-Related Financial Disclosures (TCFD), which Pau cautions is more of a guideline than a framework.
“It can be very vague. One of the pillars is called strategy, and that is very hard to justify… The TCFD is one of the guidelines that’s not a framework, unlike the SFDR [Sustainable Finance Disclosure Regulation], where it's very clear that companies in your portfolio should fulfil five of the Global Compact principles. So those can be measured,” said Pau, whose latest iteration of the BlueOnion tool allows users to compare funds' adherence to different frameworks such as TCFD and SFDR.
As climate change as a theme rises in popularity among investors, niche or thematic ESG investing have become mainstream among investors. But investors often find identifying target companies difficult.
“On the back of increased interest in ESG, clean technology like solar, electric vehicles and batteries have certainly received a lot more attention from investors,” Doug Ledingham, portfolio manager at Stewart Investors Sustainable Funds Group, told AsianInvestor.
"However, we find it difficult to allocate our clients’ capital to these businesses, despite their positive impact on development, because of an inability to gain comfort with their quality, and consequently, their ability to generate long-term value for minority shareholders." he added.
He noted that if ESG investing is to develop more in the Apac region, companies have to do more to diversify the talent among their executive management, which could ultimately make investors more confident about putting their money with them.
“Given the number of family-owned companies in Asia, we are spoilt for choice when it comes to owners with long-term time horizons: we would argue the US markets don’t enjoy such a plethora of long-term owners. However, similar to the US and Europe, Asian companies must improve the diversity of their executive management teams,” he said.