Environment, social and governance (ESG) principles are increasingly being incorporated into the investment process in Asia, but a lack of agreed reporting standards remain a barrier, finds a new survey by State Street.
The study* – based on responses from Australia, Japan, China, Hong Kong, Singapore, Taiwan and South Korea – argues that many of the traditional barriers to ESG integration are receding in Asia.
Yet the region is still lagging on this front. Nearly three-quarters of institutional investors surveyed in Asia Pacific have implemented an ESG framework in their investment process, but the proportion of global ESG assets managed in the region remains small, said Lou Maiuri, Boston-based head of State Street’s global markets business.
Of the $25 trillion of assets worldwide that incorporate some type of sustainable investment approach, Asia Pacific accounts for just 2%-3%, Maiuri told AsianInvestor, citing data from consultancy Impactvesting. And excluding Japan, Australia and New Zealand, the region accounts for just 0.2%, he added.
Asked how he sees Asian asset owners pushing ahead with their ESG policy, Maiuri said: “Asia ex-Japan is still lagging New Zealand and Australia, but we know several asset owners in the region have either increased their allocations to ESG-themed strategies or are looking to do so in the near term.”
Obstacles coming down
One thing that has long been an issue is the fear that ESG adoption would have a negative impact on investment performance, with 60% of respondents to a Cerulli Associates poll in 2015 citing this as a worry.
But in the new State Street report, 60% of institutional investors in Asia Pacific (67% globally) said it was possible to align material ESG issues and financial performance, while 58% did not believe ESG investing necessarily resulted in lower returns.
Only 8% of Asian respondents (10% globally) said they thought their fiduciary duties were a barrier to ESG integration, while 71% saw three-plus years as a realistic time frame in which to gain outperformance from ESG investments.
Still, the lack of a standardised reporting and performance assessment system continues to hold back a wider embrace of ESG by institutions.
One of the most critical aspects of this issue is materiality, in that a piece of information is material if it is likely to affect financial performance. Investors are finding it difficult to obtain hard numbers on which ESG issues an investee company regards as important, State Street said.
Naturally, most (87% in Asia and 92% globally) investors want companies to identify explicitly the ESG factors that materially affect performance.
But a major problem they highlight is the lack of industry standards for measuring ESG performance. More than half (56%) said they needed more ESG data from independent sources to make educated investment decisions.
Short-termism is another barrier to full implementation of ESG, as so many investee companies are motivated by their quarterly reporting structures.
State Street said several initiatives were trying to lengthen the decision-making time frame and were adhered to by some institutions in Asia, including Singapore’s GIC and New Zealand Superannuation Fund. These include the Focusing Capital on the Long Term initiative, the Strategic Investor Initiative and the Coalition for Inclusive Capitalism.
Moreover, Asia-Pacific institutional investors are placing an increasing importance on sustainability and climate risk when they assess their portfolio holdings, Maiuri said.
“We’ve seen significant progress in investors’ understanding of ESG over recent years,” he added, “but believe further progress can be made to move more investors from ESG awareness to full integration.”
Among Asia’s largest asset owners, Japan’s Government Pension Investment Fund, Taiwan’s Bureau of Labor Funds, Hesta Super in Australia, and NZ Super are all keenly aware of the benefits that can be derived from an ESG investment policy.
In the case of individual investors, the State Street report said the investment industry was falling behind in providing knowledge on this topic, with 83% of retail investors saying their knowledge of ESG came from their own research, rather than from their financial adviser. “If advisers want to be able to respond to this interest,” said the report, “they need to have the requisite knowledge to do so.”
Indeed, the CFA Institute’s Asia managing director, Nick Pollard, this week highlighted to AsianInvestor the need for financial analysts and advisers to adopt an ESG framework and said the institute considered this a major plank of its education strategy in the coming years.
* The study, led by State Street’s Center for Applied Research, was co-authored by Professor Robert Eccles, visiting professor at the Said Business School at Oxford University, and comprises a global survey of 582 institutional investors and 750 individual investors.