The Covid-19 pandemic may have cast a dark cloud over the outlook of 2021’s financial markets, but it has given observers a potential silver lining for environmental, social and governance (ESG) investing.

Companies and investors have placed greater emphasis on ESG when investing equities in 2020, as evidenced by more shareholder engagement and active voting, experts told AsianInvestor. One described by past year as “transitional” for sustainable investing.

Propelled by the pandemic, this trend is set evolve further in 2021 to become far more than just a ‘box ticking’ exercise for institutional investors and companies in Asia Pacific, ESG investing specialists predicted.

Nana Li, ACGA

The importance of sound risk management has never been so obvious as over the past year, Nana Li, research and project director for China at Asian Corporate Governance Association, told AsianInvestor. Despite the uncertain political environment, more foreign institutional investors are starting to vote actively in Asia and engage with companies on ESG-related issues, even if it meant using online channels due to travel restrictions, she added.

“This could significantly lower the cost and barrier of engaging with Asian companies for foreign investors…We expect more [investor] engagements and active voting to help integrate ESG factors into future investment strategies and build a healthier ESG community in 2021 and years beyond,” she said.

Flora Wang,
Fidelity International

Flora Wang, director of sustainable investing at Fidelity International, is similarly optimistic. Taking China as an example, she said a rising number of shareholders and asset managers active in the country are taking the responsibility of ownership seriously.  

The hope is that this helps to start a virtuous circle, as companies in turn are responding to rising investor participation by making it easier to take part in voting and initiate ESG engagement.

“These trends may seem small, but they represent an important direction for good governance practices in China and Asian emerging markets at large in 2021 and beyond,” Wang told AsianInvestor. “Next year in China we are likely to see an even larger proportion of investors exercising their ballots instead of simply voting with their feet and divesting, as they may have done in the past.”

This budding interest is being helped by the apparently strong performance of ESG funds in China. A report by the Ping An Digital Research Center on December 2 said the the annualised return for pure ESG funds in China was 47.07% since the beginning of 2020, it stood at 70.02% for environmental-based funds, 56.4% for pan-ESG concept funds and 47.91% for corporate governance funds. The annualised rates of all those funds stands above the 42.22% average for the overall equity fund market.

Similarly, an in-depth study of vanilla equity indexes versus their ESG variants by the HKEX on November 26 concluded that “in many cases ESG indices tended to have similar, if not better, risk-return performances. This implies that investment through ESG indices does not necessarily sacrifice financial returns, and may even enjoy better returns, while pursuing ethical investment”.  

Adrie Heinsbroek,
NN Investment Partners 

“The Covid-19 pandemic has … shown that ESG integration in investing is needed for effective financial value creation and also for social and economic value creation,” Adrie Heinsbroek, Netherlands-based principal for responsible investing at NN Investment Partners, told AsianInvestor. “The pandemic has also put new pressures on asset owners to consider their end-clients’ preferences and show how responsible investing works.”

This desire is extending beyond public equities. Last week, Japan’s Government Pension Investment Fund (GPIF) and Export Development Canada (EDC) formed a partnership to promote and develop sustainable capital markets through both green bonds and considering ESG for broader fixed income investments. GPIF, the largest pension fund in Japan and an ESG advocate, has previously invested into green bonds issued by multilateral development banks and government ministries.

CHALLENGES REMAIN

That said, there are still challenges for wider ESG adoption in Asia. Many regional markets have issued their ESG reporting guidance and published or revised their corporate governance codes over the past five years, but there is still a lot of inconsistency over the standards of reporting, Li said.

“We feel a strong need for regulators in the region to focus more on laying a good governance ground for the ESG work to keep its momentum,” she noted. 

Cédric Le Berre, UBP

Investors should rely not only on ESG scoring to analyse third-party funds, but also qualitative assessments to avoid drawing flawed conclusions, Cédric Le Berre, senior fund analyst and investment specialist at UBP, told AsianInvestor.

ESG investment is holistic and goes far beyond the traditional financial investment framework, which tends to ignore ethical, social and environmental risks, he added.

Despite the challenges, Liam Woods, head of sales for Asia Pacific at Apex Group, said some of the key driving forces behind ESG’s growing prominence in investment funds and vehicles would continue to grow in the years ahead.

Liam Woods, Apex Group

These drivers include mounting pressure from large institutional investors and an increased effort by regulators in Asia to support ESG initiatives.

“Crucially, once we come out of the other side of this crisis, investors and their portfolio companies are in a unique position to act as change agents to build back stronger economies in Asia Pacific, and ESG considerations must play a prominent part in this rebuilding. As such, 2020 has been a transitional year for ESG in Asia Pacific,” he told AsianInvestor.

Investors should rely not only on ESG scoring to analyse third-party funds, but also qualitative assessments to avoid drawing flawed conclusions, Cédric Le Berre, senior fund analyst and investment specialist at UBP, told AsianInvestor.