It is already quite a challenge for an asset owner to quantify ESG factors, and to make judgement calls based on the ESG scores of its portfolio companies.
When trying to add Asian considerations to an established, developed market framework, the process becomes even more challenging, said Hong Kong-based Shiuan Ting van Vuuren, CIO for Sun Life International HuBS, which covers the general accounts in Hong Kong, Bermuda, and Singapore.
Nevertheless, Sun Life incorporates ESG considerations into all of its investment processes and decisions. In 2021, it pledged to achieve net-zero by 2050 across its global investments and operations, with interim targets set up for diversity and climate-related operations in 2022.
The Canadian life insurer has also committed to investing $20 billion from 2021 to 2025 into assets and businesses that support carbon transition and a more inclusive economy. By 2021, $6.8 billion had been invested.
A FLEXIBLE APPROACH
Sun Life utilises third-party data and its proprietary system, the ESG+ framework, for ESG scoring and credit rating from its in-house credit analysts. The ESG+ has a scoring system from one to four on all E, S, and G risks, including non-financial risks, with one being the highest and bearing a credit A rating. The plus factor gives analysts some flexibility to apply their own judgement based on due diligence data and the information they have.
The team will give weight to different ESG factors based on characteristics of the assets or companies, to come up with a final ESG score. For example, a bank will be given more weight in governance, while environmental factors matter more for an energy company.
“We really think that if you incorporate ESG into your investment strategy, it helps you to better manage your risk. You can navigate through volatility and downturn over time,” said van Vuuren. “A byproduct of that is because you manage risk, you avoid the big pitfalls. As a result of that, you get a higher return.”
Though the established system has been effective and Sun Life is proud of it, there is still a lot of fine-tuning to do and it can be challenging.
“You can debate on: who's to say 40% (of weight) is right, 35% is not? That's the challenge,” said van Vuuren.
It is also a tough call when taking into account Asia’s unique situation, where many economies still rely on fossil fuels. “If you apply the same standards in developing markets, it is more challenging to invest in any [companies or assets] in Asia,” she said.
The Canadian life insurer managed C$1.35 trillion ($1.07 trillion) in assets globally as of March 31. The Asia business excluding Japan and Australia had $50 billion worth of assets by June 2021, with $25 billion in a general fund account to back insurance liabilities. Among the eight Asian markets it operates, Hong Kong and the Philippines are the biggest.
ENGAGEMENT AND ADVOCACY
Noting that Sun Life would consider divestments, van Vuuren said the company values engagement and advocacy, and is willing to fund those who are looking for a transition. “If companies fall short in ESG but they know they want [external] help, we should engage them on ESG advocacy.”
“I want to encourage understanding, because companies that we invest in are big companies,” she said, noting that Sun Life won’t jump on any divestment decision based on breaking headlines. The culture within Sun Life is to have top-down discussions involving multiple CIOs, credit analysts, and whoever is needed.
“That, to me, is the value that we the investment team will bring to ESG investment,” van Vuuren said.
Van Vuuren wants ESG talents who understand how ESG affects different sectors, can articulate Asian challenges to shareholders in Canada or the US, for example, and facilitate mutual agreement on whether or what kind of timeline Sun Life should give to companies that fall short in ESG.
Even so, van Vuuren doesn’t advocate giving emerging markets any special treatment on ESG scores over developed markets for their unique challenges.
“To me, I just want to make sure that we are aware of these issues. I don't advocate being handicapped,” she said. “If we just write them off and say you are handicapped, people may be less motivated to improve. I think it's very important that people know what others are doing on the other side of the globe.”
Ultimately, it still goes back to advocacy and engagement, and it's a question of when investors will get impatient with the lack of action and lack of like seriousness, she added.
TARGETS AND RETURNS
To van Vuuren, it is a continuous puzzle in trying to strike a balance between ESG targets and returns. “It's about making sure you demand more returns for extra risk. We’re not going to do it if the risk is not aligned to however much effort [is needed],” she said.
“The easy one is one that you can say is clearly greenwashing. The most challenging and what you spend the most time debating and discussing, are the ones where you can ask 10 people in the same room, and they will come up with 20 definitions.”
“Some investments are a bit lower on the ESG scoring, but are high yield. If we replace it, you're going to lose the yield. Then what happens? Do we stay on this or do we go? This kind of discussion is my life,” said van Vuuren.
Though 2022 has been a challenging year for investors, van Vuuren said renewables and infrastructure investments are always on the radar, given a $20 billion target in carbon transition investments by 2025. “I don't see investments in areas like that getting hammered when times are tough.”
She took infrastructure as an example, noting that it is a fundamental and critical tool for countries to stimulate the economy, including the US and China, where Sun Life is open to putting money into sustainable infrastructure projects.
Meanwhile, Sun Life Hong Kong in April launched the city’s pioneer ESG-focused savings plan Stellar, which will invest in sustainable assets with high credit ratings, including green bonds, renewable energy, and energy transition.
The product will also help Sun Life meet the $20 billion target, van Vuuren said.
This article has been edited to accurately reflect the name of Sun Life's ESG savings plan Stellar.