Taiwan’s Bureau of Labor Funds (BLF) will hand out a five-year NT$42 billion ($1.4 billion) investment mandate on environmental, social and governance (ESG) to external managers this year in order to promote the development of these principles among the society and investment community, according to Tsay Feng-Ching, director general of the pension fund.
“We hope to make a mandate that is related to ESG …. There is a sustainability index in Taiwan and we want to use this sustainability index as the target very much,” Tsay (pictured left), told AsianInvestor.
He was referring to the FTSE4Good TIP Taiwan ESG Index, which was jointly launched by FTSE Russell and Taiwan Index Plus, a wholly-owned subsidiary of Taiwan Stock Exchange (TWSE), on December 18.
It is the first ESG index on the island and is designed to measure the performance of 64 constituent companies on the TWSE that meet the globally recognised ESG standards.
BLF's passive mandate will be awarded to a maximum of seven investment managers, meaning they would oversee NT$6 billion each. The pension fund is currently assessing the eligibility of the managers that have pitched for the mandate. The evaluation period will end on April 20 and it will inform the candidates of its decision shortly afterwards.
The size of the domestic ESG mandate is smaller than the $2.4 billion global ESG equity mandate issued last year.
“The amount will be different, as that was an overseas mandate. It has wider investable asset classes as that was a global one. But in the one this year we'll focus on Taiwan,” Tsay said.
FTSE Russell’s new Taiwan ESG index is weighed towards a set of large companies. The top 10 stocks account for 62% of the free-float adjusted market cap index, and the largest three are Taiwan Semiconductor Manufacturing, electronic equipment maker Hon Hai Precision Industry and chemical producer Nan Ya Plastics.
The UK-based index provider is keen to promote more ESG idexes, similar to its global rivals MSCI and S&P Dow Jones. FTSE Russell said in a press release that it continues to see a growing demand, both in Asia and globally, for asset owners to integrate ESG considerations into their investment strategies.
Other Asian asset owners, principally Japan’s Government Pension Investment Fund (GPIF), have also introduced sustainable investing indexes as part of a quest to promote ESG. GPIF added three domestic Japan ESG indexes for tracking in July 2017, and is currently considering pitches from international players for international ESG indexes for some of its international passive equities.
However, the performance of the ESG strategies can greatly vary, and can depend upon the factors the index uses to select the constituent companies. FTSE Russell’s Taiwan ESG index is lagging a little, having risen 4.43% since its launch two and a half months ago, while the Taiwan Capitalisation Weighted Stock Index is up 4.74% during the same period.
Nevertheless, BLF’s Tsay remains an advocate of ESG investing, noting the concept of responsible investing is particularly gaining credence with millenials.
“There will be a new type of consumerism in the future and it is belonged to the younger generation,” he said. “When they make consumption, they care a lot about environmental issues and social justice. This is a consumption behavior that most people have not noticed but I think this consumerism will prevail in the coming one or two years.”
Increasingly, he added, younger people will prefer producers that consider the environmental and social impacts of their business, and focus on companies that do a good job in ESG.
“These companies will have a lot of potential. Their business performance may fare better [over the long term], and so will their share prices,” Tsay said.
Tsay has strategic reasons for embracing ESG as well. When asked why the NT$3.63 trillion ($124 billion) state pension manager wants to give out mandates to passively track an index, he said such mandates can encourage more investors and companies to engage in ESG.
“As a retirement pension fund, BLF’s ESG investment can lead the trend in the society and raise the awareness."
PAST ESG MANDATES
BLF awarded its first global ESG mandate in 2017, when it appointed BlackRock, Deutsche, State Street and Northern Trust to invest $2.4 billion into the Global ESG Quality Mix Equity Indexation Mandate. It was the first time BLF applied socially responsible investing principles to overseas equities.
Domestically, the fund has also issued two ESG-related mandates for a total of NT$60 billion. They track the Taiwan Employment Creation 99 Index (mandate awarded in 2011) and the Taiwan Top Salary 100 Index (awarded in 2014).
The former index tracks the 99 TWSE-listed companies that hire the most Taiwanese employees, while the latter the 100 domestic companies that pay the highest salaries. But the two are not directly related to ESG principles.
BLF was among the first batch of signatories for the Stewardship Principles for Institutional Investors launched by the Taiwan Stock Exchange in August 2016.
The Taiwanese’s efforts on this front reflect a growing trend among institutional investors in Asia to focus more on ESG factors. Aside from Japan’s GPIF, Kumpulan Wang Persaraan (Kwap), Malaysia's second largest pension fund, is working on new ESG guidelines for investing in private equity and property, AsianInvestor reported last month.
The term ESG is increasingly entering the discussion that fund houses have with their institutional clients, too. “A lot of institutional investors aren’t ready to invest yet, but they are curious about ESG and want to learn more about it,” said the head of institutional coverage for Hong Kong at an international fund house.
AsianInvestor is hosting an expert forum for asset owners in Asia to discuss how to efficiently incorporate ESG principles in their investments today (March 13). Find out more here.
This story has been updated reflect that BLF has already initiated the request for pitch process for the domestic ESG mandate, and will conclude this period on April 20.