Most asset managers point to their range of socially responsible or sustainable investment funds – which tend to screen out certain stocks – to demonstrate their responsible investment (RI) credentials.
But First State Investments takes the view that environmental or social governance issues are material ones that should be looked at in every asset portfolio.
The Australian fund house does not screen out certain stocks or assets in any of its portfolios. “We will invest in anything,” said Amanda McCluskey, the firm’s head of responsible investing in Sydney, during a recent trip to Hong Kong. A company’s approach to environmental, social and governance (ESG) issues affects the price First State is willing to pay, she explains.
And while most investors argue that ESG factors are long-term in their impact, that’s not actually the case, says McCluskey, citing the effect of corporate governance on performance. “We’ve found that companies with very poor audit governance – let’s say, where the CFO chairs the audit committee – have a much higher tendency to have negative earnings surprises.”
This leads to a practice of shorting companies that perform worse in terms of audit governance when reporting season comes around. “It doesn’t cost you much to short the worst performers, and that gives you a better chance of improving your returns,” she notes. First State does not, however, sell any of its long/short funds in Asia.
The Asian Corporate Governance Association and brokerage CLSA Asia-Pacific Markets rate corporate governance across Asian countries in their joint annual CG Watch report, the latest of which was published in September.
First State also subscribes to a database called RepRisk, a web-based tool that provides insights on environmental and social issues that present financial and reputational risks to companies. It scans the internet every day for negative news reports in the media, says McCluskey, such as Greenpeace alerts, World Wildlife Fund releases and small community alerts.
This service provides short-term information as to whether, say, Greenpeace is running an exposé on palm oil companies in the coming week, she says. “This could mean we want to be underweight companies for a certain period.”
But corporate governance is grabbing more attention among Asian investors than environmental or social issues, says McCluskey. “We get a lot of enquiries in Asia about corporate governance, reporting issues, proxy voting,” she adds.
She notes that stock exchanges are increasingly launching governance indices and calling for improved reporting requirements for companies. Hong Kong, for instance, is consulting on updating its corporate governance rules and guidelines.
“We see this as important, because when you start the process of integrating RI and ESG issues [into your investment strategy],” says McCluskey, “the first challenge you come up against is data and getting hold of the info you need to scrutinise companies. Asian companies typically do not report much on ESG performance.”
Admittedly, such reporting is not mandated in Australia, the UK or other European markets, but investors have been asking about these issues for longer, she adds. RI is a newer concept in Asia, so collaborative initiatives such as the UN’s Principles for Responsible Investment (PRI) are needed to really drive its development in the region, she says.
Still, there are a few large Asian institutions that have signed up to the PRI, including Japan’s Taiyo Life Insurance and the Fuji Pension fund, along with Korea’s National Pension Service and The Korea Teachers’ Pension Fund and Thailand’s Government Pension Fund.
Something that would provide real momentum in the region is if one of the biggest regional entities were to sign up for the PRI initiative, such as the State Administration of Foreign Exchange or the National Council for Social Security Fund in China, suggests McCluskey.
That said, asset managers – such as BlackRock, BNP Paribas and HSBC – are increasingly putting ESG and RI specialists in the region, following the lead of firms such as Aberdeen Asset Management and Dutch pension fund APG.