While institutional investors have increasingly embraced environmental, social and governance (ESG) investments as a result of the pandemic, progress at some pension and sovereign wealth funds has remained slow. Issues in fund structure and product supply are seen likely to hinder their ability to expand sustainability-themed investments even post-Covid.

Shahril Ridza Ridzuan

Malaysia's state-owned Khazanah Nasional, for instance, has struggled to convince its investee companies to adopt ESG practices. Engaging some of these firms and getting them to talk about issues that will contribute to a greener environment is difficult because some of these transitions may contradict growth in national income, according to Khazanah head Shahril Ridza Ridzuan, who was speaking at a webinar hosted by OMFIF* last Wednesday (July 29).

For example, making a big state company switch from coal to natural gas is an expensive process, he added. Khazanah in April sold a stake in Tenaga Nasional, which uses coal to generate 54% of the nation’s electricity demand.

Malaysia is on a very different ESG journey for historical and economic reasons, he said. Rather than direct ESG investments, the sovereign wealth fund appears to be focusing more on shareholder engagement in its ESG practices.

The Southeast Asian nation’s ESG progress is slower compared with some of Australia’s superannuation funds. Last week, AustralianSuper, the country’s biggest retirement fund, partnered with the country's major greenhouse gas emitters in a new initiative which will see them work towards a decarbonised future. And in July, Australia's second-largest superannuation fund, First State Super, said it plans to dump its shares in companies that derive more than 10% of their revenue from thermal coal mining. Still, Australia's moves are behind some of its counterparts in Europe and Canada.

Jang Dong-Hun

Elsewhere in Asia, some funds still lack a fundamental approach to ESG. In Korea, the discussion regarding ESG began more than 10 years ago, but progress has only been seen in recent years.  The National Pension Service of Korea, for instance, has only issued guidelines for stewardship and shareholder activitism in December last year.

However, Covid-19 has accelerated ESG investment, Jang Dong-Hun, the chief investment officer of Korea’s Public Officials Benefit Association (Poba), said during the same panel discussion.

Investors are beginning to realise that ESG investments are something necessary, not optional. The Korean government has also recently announced a new deal to accelerate environmentally friendly investments in areas such as green energy, he said. 

 

NOT ENOUGH SUPPLY

In the longer term, there are other impediments to scaling up ESG investments. For one, the benefits of focusing on sustainability when investing can take a relatively time to materialise, as they are largely an exercise in risk management and picking winners over longer time periods. In contrast, most fund products available in the markets have shorter terms.

“At the industry level, fund structures and the way incentives have been set do not align asset managers’ time frame with a long-term investor’s mindset, which might hinder further ESG integration,” OMFIF’s 2020 Global Public Investor (GPI), published late last month, reported, citing an executive from a pension fund in Asia Pacific.

For example, close-ended funds investing in private equity and infrastructure encourage businesses to think in five-to seven-year time frames while listed equities managers’ focus tends to be annual. Meanwhile, companies are subject to quarterly reporting, the unnamed executive said.

ESG issues, such as climate change, require a longer-term view as many of these issues are over more distant horizons. “We, as an industry, must think how we can better align asset managers to our position as universal and long-term investors,” he said.

Moreover, the supply of sustainable alternative assets is not sufficient at this stage, posing problems for particularly large institutions with deep pockets.

It is not as easy for an investor with a portfolio of more than $100 billion to diversify away from multiple industries and companies that carry high ESG risks effectively, as there would be little left in which they may invest. More sustainable alternatives may be difficult to find at this stage, according to the OMFIF report.

*OMFIF is an independent forum for central banking, economic policy and public investment. It is also a platform for best practice in worldwide public-private sector exchanges.