Global interest in environmental, social and governance (ESG) mandates has risen dramatically in the past decade and the pace of change in Asia has gathered momentum in the past two years. Chris Durack, Schroders’ chief executive officer, Hong Kong, and head of institutional business, Asia Pacific, said the asset manager sees demand from both companies and investors.
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According to Durack, Asian investors have become more discerning. “Clients are asking for specific evidence of how you engage with companies, how you vote and what does it mean for performance. So it feels like a bit of a structural shift. We are an active fund manager committed to fundamental research, and the evidence shows companies’ futures are intrinsically linked to the environment in which they operate. As such, we have moved forward in defining and measuring (ESG) factors to ensure these benefits are passed on to our clients,” Durack said.
ESG has been an integral part of Schroders’ active asset management for over 20 years. Schroders is rated A+ by the United Nations supported Principles for Responsible Investment (PRI) and the asset manager is a Tier-1 signatory of the UK Stewardship Code, introduced in 2010 by the Financial Reporting Council. The code sets the standard for investors in terms of monitoring and engaging with companies that improve corporate governance and long-term performance.
Asia is one region where these standards have been widely adopted. One notable example occurred in 2014 when Japan’s Government Pension Investment Fund, the world’s largest asset owner, announced it would comply with its national Stewardship Code. Elsewhere, Singapore, Taiwan and Australia have their own versions, in response to a clear sign from regulators that they want investors to hold companies to account and encourage better performance.
The value of engagement
Jessica Ground, global head of stewardship at Schroders leads a team of 12 ESG specialists who work with the company’s global investment teams.
“What you do during the ownership process can be as important as the decision to buy. One of the things we can do as active fund managers is, if we see things we don’t agree with, we don’t have to buy the shares,” Ground said.
“We’re trying to move away from just having a tick the box approach to corporate governance, to looking at things such as accounting quality, whether or not minority shareholders are protected, and overall levels of disclosure about the business,” she said.
When voting at annual general meetings, the asset manager takes on board the views of investors, as well as the best practices in international corporate governance standards. On occasion that means taking a firm stand. Of the 5,378 shareholder meetings Schroders voted in during 2017, 18% of company meetings had at least one vote against management.
Better audits, better returns
Asian companies are rapidly catching on to the value ESG can bring to potential shareholders and investors but Ground believes they could do more to strengthen external audit processes. She believes regional companies spend much less on audits when compared to their global counterparts. Schroders has reviews of a number of high profile corporate failures and believes one crucial reason for failure was poor accounting.
“Any set of accounts will have assumptions. We have to make sure those assumptions are realistic and fair. If the quality of the numbers is good, this helps overall corporate governance,” explains Ground.
The ownership structures and prevalence of family-owned businesses in Asia may not necessarily lead to governance issues. Ground said many successful founders and CEOs have made unconventional corporate governance arrangements but this different approach doesn’t necessarily mean family-controlled businesses are better or worse. Instead, she thinks the focus should be on accounting quality, how the company treats conflicts of interest and related party transactions.
In fact, according to Ground, companies with founders who are also the CEO are more likely to invest in the business and allocate capital for research, development and capital expenditure.
Despite transparency issues among Asian companies, disclosure of some data points from businesses in the region is ahead of more developed markets such as the US. For example, data on the gender composition of the workforce and wages is better, and both Singapore and Hong Kong have pushed for greater disclosure in listing requirements.
While Asian business attitudes to ESG are changing, regional regulators are also getting tougher. Those in India and China have been clamping down on bribery and imposing large fines. Technology also increases the likelihood of being caught doing the wrong thing. According to Ground “evidence is starting to show that corruption doesn’t pay.”
Reducing risk and increasing returns
Schroders regularly conduct analysis to understand who has the right policies in place, and which companies needs to improve. This information is taken into account when the asset manager makes investment decisions. “If you’re thinking about the ESG impact on your business and if you are managing the relationship well with regulators and with customers, you are future-proofing your business. Then you can raise money more cheaply and be more successful in the long term,” Ground said.
ESG statistics also stack up. According to MSCI’s Can ESG Add Alpha? report, ESG stocks can also help drive returns. The report analysed returns from two ESG based investment strategies between 2007-2015 and found both outperformed MSCI’s global benchmark. Good ESG compliance also helps protect brand reputation. The speed at which social media and digital news operates means potentially controversial issues can rapidly gain momentum. While any ESG issue could potentially cause damage, Schroders found that companies with better ESG compliance will recover brand reputation more quickly than those without.
Investors are demanding greater governance. According to Schroders’ Institutional Investor Study 20171, global institutional investors who focus on sustainability have a greater propensity to be long-term investors. Among sustainability advocates, 14% would stick to an investment strategy for more than 10 years. This compares to 8% for those for whom sustainability is not a priority. “Assessing and engaging on ESG and sustainability is critical to the investment process as companies face competitive pressures from a wide range of sources, on a larger scale and at a faster pace than ever before,” Durack said.
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1 The study was commissioned by Schroders to study institutional investors across North America, Europe, Latin America and Asia to analyse their attitudes towards sustainable investments, investment objectives and risk. Respondents represent a variety of institutions, including pension funds, foundations, endowments and sovereign wealth funds. The research was carried out via an extensive global survey during June 2017. The 500 institutional respondents were split as follows: 115 in North America, 200 in Europe, 150 in Asia and 35 in Latin America. Respondents were sourced from 15 different countries.
This document is intended to be for information purposes only and does not constitute any solicitation and offering of investment products. Investment involves risks. This material has not been reviewed by the SFC. Issued by Schroder Investment Management (Hong Kong) Limited.