More active ownership, ESG mandates expected from asset owners
Active ownership will continue to take centre stage, and more environmental, societal and governance (ESG) investment mandates can be expected from asset owners in the coming years, say asset owner and fund manager executives.
“We emphasise active ownership and through dialogue, some companies improved. So we realised the effectiveness of dialogues. So I believe it's going to be getting better in the future,” said Koji Watanabe, general manager of the equity investment department at Asahi Mutual Life Insurance.
“After that, we began to invest in bonds, such as green bonds, or infrastructure bonds, or financing assets,” he added.
Watanabe was speaking alongside four other panellists from the likes of Hesta and Thailand’s Government Pension Fund (GPF) during AsianInvestor's ESG: the New Pillar of Asset Allocation webinar hosted on Wednesday (July 7) in partnership with Natixis Investment Managers.
A poll conducted during the panel also found that 42.2% of the audience, which comprised various members of the finance industry, expected ESG-dedicated investment mandates from asset owners as the most prominent ESG trend moving forward.
ESG regulations came in second at 29.7%, and active ownership and impact investing came in third at 17.2%.
Active ownership refers to the practice of investors influencing the behaviour of investee companies, usually to transition to adopt more ESG-friendly policies.
“It's about 11 companies that represent about 75% of the carbon emissions,” said Stephanie Weston, head of portfolio design of Hesta, a superannuation fund in Australia, during the panel.
“We view very much our role as being an advocate and a force for change amongst those companies… it doesn't mean instant divestment, but it does mean active ownership, ongoing advocacy, and maintaining pressure on those companies and more generally, in the political sphere.”
The panellists generally agreed that their ESG philosophies extend to the external managers they hire.
“Starting from manager selection, we have clear criteria, that the manager has to pass all criteria and one of them is an ESG integration process. So they have to lay it out clearly - how they handle this ESG integration in-depth framework, not just with the organisation, but also to the entity that they are investing in on our behalf,” said Srikanya Yathip, secretary-general at GPF.
“We don't really expect that we have to have one platform in place… But in terms of framework concept, the framework has to be the same. First you have to have integration and you have to have a reporting system, you have to have engagement philosophy, you have to have a material factor consideration,” she added.
Takeshi Kimura, special adviser to the board at Nippon Life Insurance Company, has a similar view.
“Nippon Life Insurance adopts a decentralised approach, in which portfolio managers are responsible for integrating ESG; investment staff in the portfolio management team is responsible for carrying out ESG research, including for example, materiality or trend analysis on specific sectors or themes,” he said.
“So I think it is essential to leverage portfolio managers knowledge of a company's business model around management and determining which ESG factors [are] material for the investee company... We established an ESG Investment Strategy Office in the spring of this year; the office plays an important role in fostering ESG culture, and disseminating research on examples of ESG analysis to portfolio managers,” he said.
The asset owners also highlighted the importance of regulations and noted that some countries were more advanced in policy than others.
“I think that the urgent issue is to narrow a perception gap between investors and investee companies with regard to the degree of non-financial information disclosure,” said Kimura.
For instance, some companies may think that they are providing enough disclosure, but investors might disagree. Having regulators standardise the appropriate amount of disclosure would help in these situations, he said.
Watanabe from Asahi Mutual Life Insurance said that Japan’s net-zero goals for 2050 have helped push companies to jump on board.
“That is a big phenomenon for us. And many companies are going to sign TCFD (Taskforce on Climate-Related Financial Disclosures); I think the number is going in the right direction. And also, PRI (Principles for Responsible Investment) signatories have been increasing. So the Japanese government is very important.”
In Australia, investors are not obligated to invest in ESG, Weston said. “However, it is fair to say that most of the superannuation funds will have a reasonably large holding in domestic equities, smaller than the international equity exposure. And it is more challenging to achieve some of our carbon targets in the domestic portfolio than it is in the global portfolio,” she added.
“So there's probably two trends that work in favour of that as the superannuation industry in Australia becomes larger. Quite simply, we will be too big to continue to invest domestically, the way we do so by virtue of the growth in the industry, we will start to have less opportunity to invest domestically."
Australia has not committed to net-zero goals, which are generally deemed necessary for the world to limit an increase in the average global temperature to 1.5 degrees Celsius.