Better provision of data on environmental, social and governance (ESG) factors would help convince Asian investors of the beneficial effects of ESG integration in their portfolios, heard a recent AsianInvestor forum.
It would also help asset managers better understand the companies they invest in, argued panelists at the 11th Asian Investment Summit in Hong Kong last week.
Asia needs top-down changes to promote ESG integration, said Marcel Jeucken, head of responsible investment at Dutch pension fund manager PGGM. The fund started to consider responsible investment in 2000, as requested by its clients. Now ESG exposure has become increasingly important because it adds value and reduces risk in portfolios, Jeucken said.
One thing that would help take-up is more detailed ESG information, suggested Jessica Matthews, San Franciso-based head of mission-related investing practice, at investment consultancy Cambridge Associates. There is no perfect ESG data provider globally, and the level of information available is not sufficient, she noted, though improvements are being made on this front.
More research needs to be done, because such data is helpful for investors to understand more about companies’ activities, and decide whether they want more exposure, noted Matthews.
Lewis Grant, senior portfolio manager of global equities at UK-based Hermes Investment Management, agreed there was a huge amount of ESG data, but that not enough of it was useful, and he also highlighted issues with its accuracy.
With its proprietary ESG scoring system, Hermes quantitatively assesses the performance of companies in the MSCI World index, relative to their level of focus on ESG factors.
The findings for the period from end-2008 to end-March 2016 showed consistent share price underperformance by companies in the bottom 10% in terms of the strength of their governance (see graph below).
Hermes does not have the same research for emerging-market stocks, as there is not sufficient data for the same period, Grant told AsianInvestor on the sidelines of the event.
Yet ESG does have a significant impact on the performance of EM companies, noted Cambridge Associates’ Matthews, citing research her firm did recently but has not yet published.
While Australian investors are relatively ESG-focused, those in the rest of Asia are much more skeptical, noted Grant. Real-life examples will be key for convincing them, he said.
The case of energy major BP – which received a $14 billion fine following the Gulf of Mexico oil spill in 2010 – was a big wake-up call for investors in the stock, making them more aware of ESG factors, said Grant. The same will be true in Asia, he added: it tends to take losses closer to home to get investors to understand such issues.
Still, interest in ESG is rising in the region. Jessica Robinson, head of Asia ex-Japan at the United Nations-supported Principles for Responsible Investment (UN PRI), pointed to dramatic changes in recent years.
Japan introduced a stewardship code in 2014, while the country’s $1.2 trillion Government Pension Investment Fund signed up to PRI last year. This was “transformative” for the local market, Robinson said, speaking on the same panel.
Elsewhere, just last week the Hong Kong’s Financial Services Development Council released a report making recommendations to help Hong Kong position itself as a leading centre for green finance in the region.
Moreover, China has become a game-changer in ESG take-up, largely thanks to the mainland central bank introducing a green finance framework last year, said Robinson.
Moreover, stock exchanges in Hong Kong, Singapore and Malaysia all now require companies to be more diligent in their ESG disclosures than in the past, she added.