The attitude of private credit in Asia towards sustainable investment and environmental, social and corporate governance (ESG) has shifted, with sustainability, climate change and social concerns now considered a core objective by fund managers and their institutional investor clients.
“Investors look for it now,” confirmed the head of Asian private credit at a big asset manager, adding that it helped the global investment management corporation raise capital to invest in companies which are ESG aware.
He was speaking during a webinar on August 27 to launch The Alternative Credit Council’s (ACC) first report on private credit in Asia.
“It seems clear that organisations that have committed time and resources to managing ESG risks, in terms of governance practice, employee relations, health and safety, and management of environmental risks, have built up resilient operating models that pay off during times of distress,” said a spokesperson for the New Zealand Super sovereign wealth fund in an email to AsianInvestor.
The main driver of this shift is the recognition of the financial benefits that attention to ESG matters brings to a company.
In the report, Tracy Wong Harris, deputy secretary-general of The Hong Kong Green Finance Association, puts a figure on it, saying that "ESG investments consistently outperformed traditional investments during Covid-19 by 3%-4% across the globe".
This trend was confirmed by Jang Dong-Hun, chief investment officer of South Korean pension fund the Public Officials Benefit Association (Poba), speaking to AsianInvestor by telephone. “Previously if we invested in ESG investment opportunities we needed to sacrifice our investment objectives. But their track record has dramatically improved.”
Alexander Shaik, partner at Hong Kong-based private credit manager ADM Capital, explained on the webinar why the investment manager had focused so strongly on ESG since 2006.
“We believe strongly that supporting sustainable investments is more important in Asia than in any other place in the world. Given the low environmental base for most corporates, private lenders can make a much more positive, immediate impact on ESG in Indonesia or the Philippines than they could ever do in developed markets. And allocators of private capital to Asian fund managers want to see tangible progress in E&S implementation in their private credit fund manager portfolios,” he said.
AN ESG FRAMEWORK
ADM Capital applies an ESG framework to each deal. The challenge, said Shaik, was to persuade the investor backer whose priority is investment rather than an environmental outcome in the deal. The role of the fund manager was to persuade them that even though it would cost money to conduct ESG due diligence, it would make the business stronger and would give it access to more financing.
The ESG screening, due diligence risks, action plans and performance indicators are embedded in ADM Capital’s loan financing documents and, said Shaik, “we do have the right to declare defaults on ESG covenants if they are not fulfilled – we do take them seriously”.
The end result should be that it makes customers more comfortable to buy from the company, makes employees happier, and enables the company to access a lower cost of capital. “It can be a virtuous circle for both lender and borrower if you get it right,” said Shaik.
Poba does not go as far as that, although it does invest heavily in alternative investments. “When we screen our investment cases we always look at ESG criteria to mitigate risk associated with ESG issues. However, I don't systematically use ESG criteria,” said Jang.
One principle challenge of this is to consider the investment goals of fund managers and institutional clients, against the time horizons that effective ESG implementation often requires.
A report out at the end of July from the Official Monetary and Financial Institutions Forum (OMFIF) said the industry must think better about the alignment of asset managers' return expectations with their position as universal and long-term investors. But its ‘Global Public Investor 2020: Sustainable investment’ report questions how far this is possible.
“At the industry level, fund structures and the way incentives have been set do not align asset managers’ time frame with a long-term investor’s mindset, which might hinder further ESG integration,” it said.
OMFIF points out that close-ended funds in private equity and infrastructure encourage businesses to think in a five- to seven-year time frame, while ESG issues such as climate change require a longer-term view as many of them play out in longer time frames.
This is indeed a challenge, says Poba’s Jang. “Our team performance, our investment is evaluated on annual basis. Among Korean asset owners ESG issues are gaining more importance and in the long term they will gain momentum,” he said. “But it will be slow, I believe.”
Yet despite teething problems, the focus on ESG investment is unlikely to go away. Indeed, it could prove crucial to the region’s economic recovery from the coronavirus pandemic.
As the ACC’s report says: “Although Covid-19 has taken a toll on the global economy, it has nonetheless increased the focus on sustainable financing projects within governments’ plan for post-pandemic economic growth.”
Story updated to include Tracy Wong Harris photo.