Sustainable investing is becoming more popular in Asia, but it has gained even more momentum in the UK, with a particular focus on climate change risk.

Asset owners and regulators elsewhere will note recent developments in Britain’s $3 trillion pensions industry, where the growing focus on environmental, social and governance (ESG) factors is being driven both by both client choice and new legislation.

UK retirement funds are incorporating such concepts into their overall investment approach and increasingly adding relevant products to their platforms to cater for growing demand from members.

“[ESG investing] is going to be a significant growth area, with [UK pension scheme] members increasingly looking to reflect their personal preferences both in defined benefit [DB] and defined contribution [DC] schemes,” said Mark Johnson, head of institutional client management at London-based Legal & General Investment Management (LGIM).

Indeed, new regulations issued by the UK government on June 18 are set to accelerate an already established trend. Pension trustees will now have to produce a policy that includes an assessment of the sustainability of their investment decisions.

'CLIMATE-AWARE' PRODUCTS

HSBC’s UK pension fund, with £31.7 billion ($41.6 billion) under management, and National Employment Savings Trust (Nest), a fast-growing DC scheme with £3.4 billion in AUM, are on board with this approach.

Nest takes account of ESG factors in all relevant asset classes and portfolio construction, and seeks to ensure its fund managers are appropriately monitoring and managing ESG risks, said John St Hill, deputy CIO.

“We have questions in the manager appointment process that are concerned with responsible and sustainable investment,” he told AsianInvestor.

Indeed, in mid-July Nest announced its first commodity investment mandate, incorporating climate risk-focused exclusions. The portfolio – run by US firm CoreCommodity Management and investing mainly in commodity futures but also equities – will screen out energy producers with the highest exposure to climate risk, including coal.

It will also exclude producers focusing on thermal coal, palm oil, uranium and tobacco, and on mining for cobalt from cobalt mines in the Democratic Republic of Congo. The exclusions are based on the methodology in Nest’s existing climate-aware fund, to which the scheme’s default fund has an allocation

The new portfolio will make up one of the asset classes in the scheme’s default strategy, where more than 99% of Nest members are invested.

This comes after Nest added a climate-aware fund into its portfolio last year that it developed in partnership with UBS Asset Management. The scheme’s default fund also has an allocation to the strategy, which favours companies whose business models are consistent with maintaining global temperature rises below 2° Celsius ­– the goal of the Paris Agreement that has been signed onto by all of the world’s major governments except the US's.

Similarly, HSBC’s UK pension trust uses a multi-factor fund with a climate change tilt as the equity default option for its own £3.7 billion DC scheme. Mark Thompson, the trust's CIO, said the pension fund helped develop the product with LGIM and index provider FTSE and transitioned to it in January last year.

Moreover, the trust, which also runs a £28 billion DB scheme, supports initiatives such as LGIM’s Climate Impact Pledge, Thompson told AsianInvestor. Introduced in November 2016, the pledge seeks to accelerate the progress companies are making in addressing climate change and transitioning to a low-carbon economy. On June 11, LGIM made its first announcement of the corporate leaders and laggards on climate change.

ASIA LAGGING

UK retirement funds are, on the whole, well ahead of their peers in Asia in their approach to sustainable investing, although there are notable exceptions. Japan’s $1.2 trillion Government Pension Investment Fund and the New Zealand Superannuation Fund are among those leading the charge globally with forward-thinking initiatives in areas such as emission reduction and corporate governance.

Some Malaysian asset owners are also making moves in this direction, such as the country's Employees Provident Fund, Prudential Malaysia and Axa Affin Life.

Yet some industry experts still feel investors in Asia generally only follow ESG guidelines because they have to rather than because they want to, as delegates at an AsianInvestor forum heard in March.

That suggests that more regulation may be needed in the region, just as it has helped drive ESG adoption in the UK.

Chinese authorities have recognised this and are making a concerted push in this area this year. The China Securities Regulatory Commission and China Banking and Insurance Regulatory Commission are both working on proposals to improve corporate goverance. And the Asset Management Association of China in July consulted on guidelines designed to foster green investment and better corporate governance. 

UK INSURERS ON ESG

Meanwhile, insurance firms in the UK are showing an increasingly advanced approach to sustainable investing, according to speakers at the FT’s Managing Assets for Insurers forum in April. Rather than simply designating part of their portfolio to ESG strategies, they look to ensure such concepts permeate their overall allocation approach.

MS Amlin, a London-based property-and-casualty based insurer, has long encouraged its asset managers to sign up to the UN Principles for Responsible Investment (UNPRI), and requires them to report back to the insurer on this, said Jane Styles, the firm’s chief investment officer.

“But we’re not thinking of having an ESG-specific allocation,” she noted. “I’d rather be holistic across all we do.”

Similarly, ESG affects US insurer AIG’s portfolio construction process, said Guillermo Donadini, CIO for international (non-US) markets. 

“We have a lot of ESG initiatives on an asset class basis,” he noted. “That affects the way we manage our credit portfolios and which sectors we are invested in through our portfolio construction process.”