Investing based on environment, social and governance (ESG) factors is likely to gain traction in Asia as a result of separate, independent trends in the private wealth segment and among institutional clients, said Henry Fernandez, chief executive of index provider MSCI.
For one thing, he pointed to a rising interest in ESG among affluent investors, particularly as younger generations succeed and manage family wealth.
“A lot of founders realise they need to allocate wealth [to other family members] as it grows ... so they build family forums and constitutions, and in those forums millennials can influence their parents on where to invest,” said Fernandez.
And Asian wealth is growing fast. The continent now accounts for the largest number of millionaires (5.1 million) and the most wealth, at $17.4 trillion, according to Capgemini’s annual Asia Pacific Wealth Report, published in 2016.
Meanwhile, Fernandez said more institutional investors in Asia, particularly pension and sovereign wealth funds, would implement ESG approaches, on top of those already that are already doing so, such as Japan's Government Pension Investment Fund.
As a result, MSCI plans to add ESG-focused staff in Asia to increase its research and commercial coverage and boost its regional revenues, which it sees as lagging those in Europe and the US, as reported yesterday.
Others in the market are also confident about the growth of sustainable investing. Increasingly Asian institutions are looking to have an ESG component to their mandates, said Wayne Bowers, chief executive and chief investment officer for international markets at Northern Trust Global Investments.
This has mainly been from North Asian or Australasian investors, he told AsianInvestor. “They have shown a keen interest in understanding screening methodology and they are very happy to allocate money to strategies with ESG screening or focus.”
More information, lower tolerance
And Fernandez said the institutional focus on ESG would only increase as a result of the growing availability of information about businesses and the lower tolerance of negative issues.
“I was in South Korea recently and [some investors] said ESG had not really arrived there,” he said. “I said President Moon [Jae-in] was a product of ESG due to [impeached former president] Madam Park [Geun-hye] being affected by the impact of [the rapid dissemination of corruption claims on] social media; people took to the streets as a result, which helped lead to her impeachment.
“If you really analyse the media,” said Fernandez, “not a week goes by without an ESG issue affecting some institution in the world.”
He pointed to other recent examples, such as Travis Kalanick, CEO of cab-hailing app Uber, being forced to step down thanks to allegations of widespread sexism in his company. He also cited the decision by search giant Google to fire James Damore, an engineer who wrote and distributed a memo arguing that biological differences were behind a shortage of women in technology.
Positive impact on performance?
All that said, Fernandez conceded that for institutional investors to embrace ESG, they would need to see evidence that such strategies will have a positive, or at least neutral, effect on investment returns.
“Our advice to clients is that they should not invest in ESG at the expense of performance at all,” Fernandez said. “However our view is that over the long term you have to be invested on a sustainable basis.”
He argued that considering ESG factors is particularly important from a risk management perspective. This matters especially for long-term investors such as pension funds and sovereign wealth funds, which are designed to hold money for generations and often hold investments for decades.
Fernandez said that over such time periods companies that don't consider ESG issues can come to regret it.
“When [companies take] short cuts away from ESG, it often materialises in negative values; whether it's over one year, three, five or 10 years, eventually they catch up,” Fernandez argued, noting that one high-profile example was Volkswagen.
The German car maker had been for years for having insufficient governance standards, and last year the company was discovered to have been artificially lowering the carbon emissions of some of its diesel cars. It received a $2.8 billion penalty in the US in April.