Asian asset owners who are just starting to develop their ESG framework may feel increasingly intimated by the challenge of implementing it. 

While the Responsible Asset Allocator Initiative (RAAI) set up in 2018 by Scott Kalb, the ex CIO of Korea Investment Corporation, highlighted how well Asia ranked in terms of total assets being managed responsibly, the numbers were heavily skewed by Japan’s Government Pension Investment Fund (GPIF). 

In truth, Asian funds ranked represented just a fifth of the 197 funds in the survey. 

Jayne Bok, head of investments at Willis Towers Watson in Hong Kong, recommended that asset owners looking to set up an ESG investment framework start by speaking to peers who are a few years down the ESG road, and learn from their experience. 

“And spend time with managers who have taken a stronger stance on ESG, to understand what it means for their investment processes and performance,” she added. 

Jayne Bok 
Willis Towers Watson

In May 2019, the Hong Kong Monetary Authority (HKMA) set out its objectives for sustainability across its range of responsibilities. As the manager of the Exchange Fund, the investable portion of its foreign currency reserves, the HKMA said it would prioritise ESG investments if their long-term return compares to equivalent assets on a risk-adjusted basis. 

Specifically, the HKMA has incorporated ESG factors into its investment risk analysis, including in bond investments. It has invested two tranches of $1 billion in the managed co-lending portfolio programme (MCPP) run by the International Finance Corporation, a substantial part which targets sustainable investments across emerging markets.

HKMA has also committed to expanding the Exchange Fund’s green bond portfolio, through direct investment and via green bond funds. And it will accord green accreditation as an important factor in its real estate investment portfolio.

However, former chief executive Norman Chan has said the de facto central bank would not set a quantitative threshold or target for green investments. 

“We believe our present approach is a more pragmatic and likely to be a more effective way of promoting ESG investments,” Chan said in May 7, 2019. “We will continue to work with like-minded investors to promote focus on good ESG practices in managing their investments.”

SUSTAINABILITY PUSH 

The UN’s 17 Sustainable Development Goals (SDGs) are increasingly widely recognised by large global investors as the basis for ESG investing. 

In Europe, for example, some of the Dutch pension funds have integrated the SDGs into their responsible investment policy and are investing in opportunities linked to them. 

Other investors continue to determine how the SDGs might fit within their existing investment mandates. As the Thinking Ahead Institute’s recent study observed, it’s still challenging to educate people about the benefits of mixing sustainability concepts into long-term investing plans.

Getting big asset owners to accept and introduce ESG into how they invest is important. The ‘Thinking Ahead’ report produced by Willis Towers Watson notes that the 100 largest asset owners are responsible for over 35% of all global asset owner capital. Their assets under management amounted to $19 trillion at the end of 2018. 

Encouragingly, many of the larger self-declared “universal owners” are long-term and leadership-minded. 

Japan’s GPIF certainly sees itself in this way. The ¥161.8 trillion ($1.5 trillion) fund requires all asset managers to integrate these concepts into their investment analysis and decision-making. 

“We regard the purchase of green, social and sustainability bonds as one of the direct methods of ESG integration in the fixed income investment,” CIO Hiromichi Mizuno told AsianInvestor

Hiromichi Mizuno, GPIF

At the end of March, the world’s largest pension fund had allocated ¥378.8 billion to a specially-created low carbon index for Japanese equities, and ¥1.21 trillion to the low carbon index for foreign equities.

Mizuno acknowledged that for a fund of GPIF’s size, “it will take time to achieve our aims”.

Asset owners are improving their global best practice on sustainability, but still has a long-way to go, noted Bok. “Asset owners in Asia need to undergo a cultural, operational and business transformation that puts sustainability at the core of all investment models,” she said. “Purpose, mission and vision need re-setting. This suggests strategy and culture should change. Funds have to build a more coherent view of their core stakeholders and their needs.”

Structural changes in the asset owner model complicate this sustainability goal, however. For example, the de-risking trajectory of the average defined benefit pension plan and the constraints and governance challenges faced by DC plans are obstacles to progress. 

“We also see a step-change in the focus on sustainability by insurance companies, whilst sovereign wealth funds are still struggling in this area, due to political constraints,” said Bok. 

This story was adapted from a feature about asset owner integration of ESG that originally appeared in AsianInvestor's Winter 2019 edition.