Sizing up the status of asset owner interest in ESG

Ask asset managers, index providers or consultants about investment trends and one topic is guaranteed to arise: ESG. 

Fund products with an environmental, social and governance slant are all the rage these days. Ask most asset owners about their views on ESG, and they also declare their interest. It’s no bad thing to be seen as environmentally conscious and focused on transparency, after all.  

But there’s a lot more talk than action when it comes to implementation. To date just a handful of major institutional investors have assigned large sums of money into ESG-compliant mandates or implemented such metrics into their portfolios. 

According to a report in March 2016 by Global Sustainable Investment Alliance, only $52.1 billion of funds in Asia excluding Japan were managed with “responsible” investment strategies. That’s a fraction of the $12 trillion in Europe, $8.7 trillion in the US and $473.6 billion in Japan.

“The whole world is talking about ESG-dedicated allocations … [but] I think they are doing a marketing campaign,” asserted Sophia Cheng, CIO of Cathay Financial Holdings. “Some of our peers are not as good [as us in ESG], but they know very well how to present.”

Certainly, there is limited high-level commitment among Asia’s asset owners. 

The United Nations Principles for Responsible Investing (UN PRI) is seen as the leading body for promoting ESG. All told, 373 asset owners have signed up to its six principles of responsible investing. But just 21 of these are based in Asia ex-Australia, and 16 of them reside in Japan. There are none from China, Hong Kong or Singapore, and just one from Korea. 

What will it take to get Asia’s asset owners to engage more with ESG? 

ESG ADVOCATES 

The disparity between words and actions among asset owners is mostly due to a lack of familiarity. 

Most regional investors now know what ESG is, but many aren’t certain how to introduce it into their investments. There are prosaic reasons too: executives of state-linked pension funds often have little incentive to change their behaviour.  

This is ironic, given ESG can be a boon to long-term investors. Conducted properly, it uses data points (or the lack of them) to identify which companies have opaque governance, or are less gender-friendly, or treat their staff worse, or source raw materials from polluters or conflict nations. 

In other words, it analyses which firms have bad practices that could hurt performance, and which are safer or more promising investments.

To date a few public pension funds have been strong advocates of ESG in Asia. The most famous is Japan’s Government Pension Investment Fund (GPIF), Asia’s pension fund goliath. It assigned ¥1 trillion ($9.1 billion) in passive domestic equity assets and is set to do the same with international equity indexes soon. Most importantly, it demands that all of its fund managers follow ESG protocols when managing money on its behalf. 

For Hiromichi Mizuno, the chief investment officer, the decision to promote ESG is simple: focusing on genuinely long-term change. 

“Hardcore investment professionals, [told me] that ESG doesn’t help them to make a better return,” he told AsianInvestor in an interview.

“I keep telling them they need to change their mindset because what GPIF doesn’t want is that you make a return tomorrow at the expense of the future sustainability of the company [being invested into] or the [capital markets] system.”

He noted that GPIF’s setup (it’s not allowed to directly invest) means that its biggest risk is the stability of the capital market and society. Mizuno said he saw ESG as “sustainability and inclusiveness”, one of the best means to ensure its fund managers and the companies receiving its money consider environmental and social stability. 

“When we introduced the ESG indices we [wanted it to not] only be the topic among the investment professionals but [for] the corporate executives to talk about the ESG and the general public to talk about ESG,” he said.  

Taiwan’s Bureau of Labor Funds (BLF) has also engaged. It appointed seven fund houses to invest NT$42 billion ($1.4 billion) of ESG passive equities on April 8, tracking the FTSE4Good TIP Taiwan ESG Index. That followed its $2.4 billion multi-factor ESG mandate in September 2017, which tracks MSCI benchmark indexes.

Another notable ESG participant is Malaysia’s Kumpulan Wang Persaraan (Kwap). The MYR137 billion ($32.1 billion) pension fund became the first Malaysian signatory of PRI on February 7 and employs three full-time ESG officers, which oversee ESG guidelines over its investments. CEO Wan Kamaruzaman Wan Ahmad estimates that 60% of its AUM is already ESG-compliant and reportedly wants to get this up to 70%.

SLOW ACCEPTANCE

These are the region’s outliers. Other major investors have yet to fully embrace ESG. 

Korea’s National Pension Service, the world’s third-largest pension fund, is on the way. It became a UN PRI signatory, had W1.8 trillion ($1.68 billion) in socially responsible investment funds at the end of 2017, and aims to sign the country’s stewardship code by July. However it has yet to add ESG principles into its overall portfolio. 

No Hong Kong or Singapore asset owner has signed up to UN PRI, although 19 fund houses in the former and 12 in the latter have signed up. 

The interest among insurers is also muted. Some international insurers such as Axa Insurance are adding ESG funds to their regional businesses. 

Cathay Financial Holdings is also engaged. While its subsidiary Cathay Life has only made small direct investments into ESG funds, Cheng said it has dedicated internal ESG analysts and screens the ESG practices of all companies it invests into, while 80% of its external manages incorporate ESG into their investing processes. 

Other Asia-based life insurers are less assertive when it comes to ESG. Notably, there is no non-Japanese Asian insurer signatory to UN PRI (Taiwan-based Cathay Financial has the political spectre of China preventing it from signing up).

Nic Nicandrou, chief executive of Prudential Corporation Asia, told AsianInvestor many regional insurers fear that ESG could make investment returns less predictable—a key concern for firms needing to cover policy liabilities. 

“Typically the life business is most interested in asset managers delivering a return that is not too different to what is illustrated,” Nicandrou said. Prudential’s wholly owned, Singapore-based asset manager Eastspring Investments signed up to PRI in February. 

Other regional insurers are also beginning to slowly focus on ESG, but are beginning with internal compliance and risk assessment, noted Christine Chow, an associate director for engagement at Hermes EOS, an adviser on ESG integration to companies and investors. 

“As a whole they first embrace on a corporate level what ESG means for them, and the next stage of discussion is to consider [signing up to] PRI and committing to ESG in their investments,” she told AsianInvestor. Chow is optimistic they will eventually bring ESG to bear in investing as well.  

It’s worth noting that most ESG investment mandates in Asia to date have been for equities, and insurers invest mainly into debt. But the intersection of ESG and fixed income is growing. China in particular is pushing for green financing, which is encouraging green bond issuance. 

European insurers have had no problem introducing ESG into their investing processes. Speaking at a Financial Times forum in London in April, Jane Styles, chief investment officer at MS Amlin, a London-based property-and-casualty based insurer, said her company had “encouraged our managers to sign up to the UN Principles (UN PRI) for a very long time, and have required our managers to report to us on this”. 

MS Amlin’s approach to ESG is also not mandate specific. “We’re not thinking of having an ESG-specific allocation—I’d rather be holistic across all we do,” she said. 

Joe Marsh and Jolie Ho contributed to this article. 

Look out for the second part of this ESG feature, which was originally published in AsianInvestor's April/May 2018 edition.