One small step for South Korea’s National Pension Service (NPS), one big step for the advance of environmental, social and governance (ESG) investment principles in Korea?
It's not an unreasonable question to ask now that the world’s third-largest pension scheme is set to regularly update stakeholders on its pro-green policies and corporate stewardship.
At a public seminar last week in Seoul, chief investment officer Ahn Hyo-joon said NPS, which had assets under management of W660 trillion ($568.99 billion) as of January, would begin publishing an annual report on its ESG practices.
It might look like a mere box-ticking exercise but according to a source familiar with the thinking at the national pension scheme, the move is wrapped up with NPS's whole drove to better diversify its investments, whether overseas or in alternative assets.
By measuring up more favourably with its global peers on ESG, NPS hopes to be able to gain better access to overseas investments and to partner up more effectively with other institutions in co-mingled funds, the source told AsianInvestor on condition of anonymity.
In this way, the pension fund could also blaze a trail for other Korean institutional investors by shifting socially responsible investing further up the national agenda.
That's after a tough 2018 focused the attention of Korean institutions on their outsized exposure to equities, especially domestic equities, and the need to diversify. NPS, for example, made an overall negative return of 0.92% for the year.
NPS has a five-year average return target of 5.3%, set last year by its fund management committee, so the focus has been very much is on how to recover and catch up on that performance. It was no surprise, therefore, when Ahn only sounded a vague ESG note at AsianInvestor’s 13th Institutional Investment Forum Korea in Seoul earlier this month.
“Currently, many institutional investors, including the top pension funds, are stressing the importance of responsible investment, incorporating non-financial factors such as ESG practice. We will expand the responsible investment to the public pension fund step by step,” Ahn said.
But the move by NPS to publish an annual report on its socially responsible investments represents one such step.
According to another Korean pension fund CIO, Lee Chang-hoon of Government Employees Pension Service, there are difficulties incorporating new ESG factors due to a lack of accumulated data to verify their relevance.
“Whether these factors actually help to improve performance, and how they work in each country, we don’t have much data on value and cyclical factors,” Lee said at the AsianInvestor forum. “The factors are old and validated, but because we are rule-based investment firms we are not able to actively use ESG factors.”
Instead, Korean investors are primarily doing “negative screening”, for instance weeding out investments in alcohol and tobacco, he added.
One Singapore-based director at a UK-based asset management company told AsianInvestor that he is continuously discussing the ESG topic with Korean institutional investors. However, he is somewhat pessimistic on expectations for changes in the short term.
“ESG investment criteria are still low on the agenda, or even new territory, in Korea. And as last year showed, traditional performance and how to diversify overseas are still hurdles to overcome for Korean institutional investors,” the director said on condition of anonymity.
The need for greater diversification overseas might yet provide the catalyst for better ESG adherence. With the Korean economy dominated by chaebols – massive, highly diversified and politically well-connected conglomerates – promoting ESG has tended to be a sensitive topic for external shareholders, both for public investors and the private asset management sector, various sources have told AsianInvestor.
Although NPS in March showed an unprecedented assertiveness as a shareholder, ESG investing is more prevalent and sophisticated in developed markets around the world that Korean investors are increasingly looking to gain more exposure to. This includes a wider interface with both overseas asset managers and other institutional investors, either directly or indirectly via funds.
According to sources familiar with NPS's investment strategy, the pension fund increasingly wants to partner with locally based institutional investors around the world to benefit from their local expertise through joint ventures. Two other Korean asset owners – Korea Investment Corporation and Public Officials Benefit Association – have said much the same thing.
That increased global interconnection will most likely make Korean investors more inclined to benchmark themselves against their global peers on ESG grounds. Global ESG standards might also, in turn, flow back into Korean markets as overseas investors in Korea make their voices heard.
And as with Japan’s Government Pension Investment Fund, Korea's national pension fund could provide the guiding light for the country's institutional investors as they seek to diversify their holdings overseas.