Asia Pacific's family offices are a nimble bunch and never more so than when it comes to ESG where they're already proving to be ahead of the regulators.
ESG investing typically gets represented by an image verging on cliché: a healthy young plant sprouting from a pile of coins.
The idea of making money while doing good is appealing – particularly given the developments of recent years. Until the advent of the coronavirus the impact of climate change was a weekly topic in media headlines.
Added to that, Covid-19 has underlined the importance of worker rights, identifying social norms and protective equipment to minimise the spread of disease and a need for greater
ESG can plausibly claim to encapsulate all these noble efforts. But at its heart it is about risk, and the process and measurements needed to reduce it.
Even hard-nosed investors would admit it’s a good idea to consider the dangers of additional regulation and fines on heavy carbon emitting companies, and the production and reputational risks that companies take if they don’t take their employees’ welfare seriously.
While these may not have an imminent impact on a company’s financial information, they look set to have an eventual impact.
“We are starting to see that non-financial factors have a financial materiality at some stage, and when they do, you have to integrate them into your calculations,” said Jens Peers, chief investment officer for fund manager Mirova.
Increasingly, there is evidence to show that incorporating ESG factors into investing works.
Fund research provider Morningstar concluded that 35% of sustainable US funds placed in the top quartile of performers in 2019, and almost two-thirds in the top two. Sustainable equity funds were particularly strong performers; 41% sat in the top 25% of fund performers.
“It’s a fair thesis that ESG factors when managed well produce more value and if you neglect them then you leave something on table,” said Roger Urwin, co-founder and global head of investment content at the Thinking Ahead Institute.
The easy messaging combined with signs of outperforming has stoked more investment flows. Morningstar estimates that sustainable mutual funds and exchange-traded funds in the US saw an almost fourfold rise of net inflows to $20.6 billion in 2019, while ETFGI estimated the assets of ESG
ETFs across the world rose to $52.35 billion at the end of last year.
That is a fraction of global assets. But investors are increasingly embracing ESG considerations. Japan’s Government Pension Investment Fund, for instance, has said it will only offer external mandates to fund managers that embed ESG considerations across their investment decision-making.
Trevor Persaud, head of investment solutions at AIA, said the insurer has begun pursuing a fundamentally inclusive approach to ESG in its investments, rather than through specialist investments.
“We don’t believe in ESG-specific indices but in investing for the long term as global stewards of the right standards,” he told AsianInvestor. “While ESG did well during the recent crisis, we think that was faddish and a confluence of many factors. Instead we think that long-term sustainability factors and a sustainability philosophy should add value.”
Perhaps the biggest limitation to the growth of ESG, particularly among institutional investors, has been a lack of consensus over how best to measure it.
There are dozens of ESG data providers, from the likes of global index providers MSCI and S&P Global all the way down to small independent climate risk agencies. And each one slices their data in slightly different ways.
Each fund house tends to favour the data from a selection of these data providers when analysing stocks and bonds. The result is a bewildering array of ESG-compliant funds, each of which apply their factors in slightly different ways.
“At this point in time people are grappling with the lack of standardisation. There are enough standards but not standardisation,” said Pat Woo, a partner for business reporting and sustainability in Hong Kong at KPMG.
This story was adapted from a feature that originally appeared in AsianInvestor's 20th anniversary edition, which was published in late June.
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