As more Asia Pacific asset owners declare their commitment to environmental, social and governance principles and zero carbon emission targets, they need to decide how best to persuade portfolio companies to also commit to these goals.
Increasingly, large regional institutional investors seem to believe in engagement over exclusion, using their influence as major investors to drive change in companies in need of ESG improvement rather than avoid them.
“If we’re not in there, there is even less of a chance to move them,” an executive at a regional sovereign wealth fund told AsianInvestor, to explain why his organisation holds positions with companies not currently aligned with global climate change principles.
Indeed, some asset owners make investments into promising companies to encourage their adoption of greener practices. Singapore’s GIC offered this rationale for its investment into Duke Energy in January this year, arguing that it wanted to help accelerate the power company's five-year clean energy transition plan.
GIC did not respond to repeated requests for comment on its approach to engagement.
Other asset owners consider ESG monitoring and encouragement to be an integral part of its everyday corporate engagement. Dutch pension fund manager APG, which invested €570 billion ($688 billion) on behalf of three Dutch retirement funds at the end of April, is one.
“We roughly know, per company, what we don't like and where we see improvement. Once we complete the ESG analysis, we know where the shortcomings and areas of improvement are, then start the engagement,” Park Yoo-Kyung, head of Asia Pacific responsible investing and governance at APG told AsianInvestor.
The number of interactions depends on the company and the issue. “It’s not about how many calls. What’s important is: has progress been made?” Park says.
The pension fund manager will also discuss ESG-linked issues that are important to their clients – such as human rights, Park says. She notes that corporate exposure or business dealings with Myanmar, which has just suffered a coup and increasingly bloody suppression, as an example of an issue on which APG is engaging with portfolio companies.
The scope of fiduciary duty does not stop at internally managed assets. Park says APG’s ESG team often sits with portfolio managers on quarterly business update calls with investees and requests that they make progress updates on ESG matters.
And while it manages 80% of its assets internally, it still engages under its own name for the 20% of externally assigned assets, too. Park said APG believes portfolio companies are more receptive to calls from their direct investors than from third parties.
“We should be accountable for the entire investment process, from due diligence to the way we exercise our rights and advise investees,” she said. “If we don’t take appropriate actions, when our investee shows sub-standard ESG quality it is our responsibility as well.”
FIXED INCOME CHALLENGE
Asset owners and fund managers alike have traditionally found it easier to introduce ESG principles to equity portfolios, both because shares confer voting rights and they mean the asset owners are company owners. Possessing some of a corporation or government’s debt is a murkier relationship.
APG’s Park acknowledges that it is often easier to exert influence as an equity shareholder than a fixed income investor. “When there's an issue, our fixed income portfolio managers do raise it with the CFO (chief financial officer) or senior management, but they don't have the rights shareholders typically have.”
Private, or alternative, assets are another matter. These investments often mean direct ownership in a piece of property, infrastructure or company, either directly or through a general partner fund. That can offer asset owners a lot of power to bring up needed ESG changes.
“With direct investments, we can sit down with the senior management or board, and sometimes we are part of either management or board driving ESG changes,” she adds.
Park said real estate platforms ESR, Lemon Tree, and Chong Bang are examples of direct investees with which APG has engaged on ESG matters.
"Over the last 12 months we have heavily engaged with ESR to develop a more comprehensive ESG strategy and in particular to focus on the risks and opportunities to the business regarding climate change," Park said. "ESR now has a 5-year roadmap with specific ESG objectives and targets, as well as undertaking climate risk analysis and reporting via TCFD (Task Force on Climate-Related Financial Disclosures)." ESR received its inaugural A rating by MSCI ESG Ratings in April.
Not many asset owners enjoy the size or dedication to make such an active approach to ESG engagement via internal staff. Those that want to exert influence can hire progressive ESG fund managers, and go a step further and employ ESG specialists that can represent their interests.
One example of this is EOS, the stewardship service of Federated Hermes. As of April, the company has engaged with 96 companies “in Asia and emerging markets” on behalf of about 50 institutional clients from around the world.
Michael Viehs, head of ESG integration at Federated Hermes, says EOS is employed by these asset owners to help these companies improve their ESG commitments. It typically sets out concrete goals for the businesses to achieve “over a three-to-four-year period” and uses an internal milestone system to track the success of the engagement (see box).
EOS ENGAGEMENT MILESTONES
Like Park, Viehs says the number of interactions with each company varies. In EOS’s case it considers the type and volume of the engagement objectives, the importance of the issues and the size of its client’s stake in the company.
“If the stake is higher, we tend to engage on a more intensive level, the value which is at risk if the ESG risks were to materialise is bigger.”
He adds that EOS tries to meet with each company on their engagement plan at least once a year.
While outsourcing can clearly bring sectoral, geographic and thematic expertise that an asset owner may internally lack, some of the latter are sceptical about its effectiveness.
“What level of insight can you get from [outsourcing]?” questioned the sovereign wealth fund executive. “It clearly lowers the engagement. You can’t directly discuss their business strategy, for example.” he says.
He said he is also concerned that some asset owners will simply appoint external providers to show they have taken some ESG action, without taking it seriously – something worryingly akin to greenwashing.
The executive highlights other ESG engagement worst practices, such as poorly defined action points and a lack of follow-through.
“What is being recorded as an engagement? Does simply sending an email or making a phone call count as one engagement? Is that assigned the same value as having a meeting?”