Value over values in ESG for Apac asset owners: survey
Asia Pacific (Apac) investors seem to put a relatively higher focus on what ESG can do for investment gains, rather than how ESG investing can fuel progressive output, compared to their peers in North America and Europe.
According to a global survey of institutional investors by State Street Global Advisors, there is a relative lag among Apac asset owners when it comes to prioritising focus on integrating ESG for carbon reduction, climate strategies, and environmental factors; or the development of an internal ESG framework. On the other hand, Apac asset owners are on par with European peers when using ESG to find alpha investments.
Kevin Anderson, Apac head of investments at State Street Global Advisors, pointed out that regional differences in the survey were only off by a few percentage points. However, he did find it surprising that the climate and carbon reduction priority seems to be relatively lower in Apac, despite Australia’s focus on carbon investments; and Hong Kong and Singapore regulators’ implementation of new frameworks this year.
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“Fixed income as an asset class, and especially sovereign bonds, still [make it] more difficult to create a transparent outcome [compared to] equity, where ESG has been a much more developed focus. So, I don’t think we likely would see the same outcome if the carbon-reduction question only concerned equity investments,” Anderson told AsianInvestor.
Apac investors are still relatively focused on the value aspect of ESG and how they can derive value for the stakeholders, both short- and long-term. While focus on returns may drive the short-term view, value can be exposed over the long-term, so the two approaches are compatible, according to Anderson.
“There is a focus on value rather than values, which is exhibited through a sound investment framework. Ultimately, that is displayed through the Asia Pacific investors’ focus on the Paris agreement-aligned benchmarks in fixed income: a proven set of standards that, as we progress on the understanding of climate science, will [eventually] be replaced by others but right now are the benchmarks in use,” he said.
The findings were based on a global survey done in May 2022 of 700 pension funds, endowments, foundations and sovereign wealth funds, as well as wealth and asset managers — 110 of which were from the Apac region.
THE BOND FACTOR
In some domestic bond markets around Apac, it can still be hard to accomplish carbon reduction in a meaningful, transparent, and effective manner. In the Australian dollar bond market, for instance, the coal mining industry belongs to one of the larger carbon-intensive parts of the Australian economy.
Nevertheless, financing is primarily done by banks and less through domestic bond issuance. With a nascent green bond market in Australia and in Asia, it may be harder to accomplish a carbon reduction strategy within the domestic bond market, compared to other regions.
“It is encouraging to see Asian banks growing their issuance of green bonds, creating transparency around green financing in especially Hong Kong, Singapore, and Japan. So, we may see Asia Pacific investors increase their priority in the fixed income space as it ultimately becomes easier with this transparency,” Anderson said.
The harder it is to integrate ESG into investments, the less of a priority it might become. Insurers in particular have a relatively high preference for sovereign bonds, and thus face a challenge of ESG not being as well integrated and evolved as corporate bonds, equity, or private market assets.
“We are certainly having conversations with some insurers who are very interested in how they would affect an environmental focus into their portfolio, because there is ultimately a risk in those highly carbon-intensive industries. But given that fixed income ESG is slightly less developed than equity, those with high fixed income allocations are earlier in the process,” Anderson said.
Data and analytics are needed for investors to understand potential outcomes before they choose their ESG investment products. The multiple tradeoffs of investment decisions need to be considered, Anderson pointed out, nodding to the advantage that ESG factors by default involve a lot of reporting and data.
“ESG is much more established in equity now than 5 years ago, and challenges in data still exist, but the framework has been far more developed. Fixed income is behind the curve, especially for sovereign bonds,” Anderson said.
He emphasised that returns are important — but so is the reduction of risk.
“The uncertainty created through climate change-related factors can lead to unwanted risk in portfolios, so the evidence seen through shorter-term returns may not be seen as quickly as through risk or risk-adjusted returns. Typically, investments with the greatest risks, for instance in energy transition, will have greater volatility without necessarily paying investors for that uncertainty,” Anderson said.
Anderson also addressed that Apac seems to place a higher priority on impact investments and social factors than in other regions. The focus goes beyond current global common elements, including investors’ change in sentiment over Russian fixed income due to the war in Ukraine.
He elaborated that social and impact investing are somewhat linked together in Apac, and a higher portion of the survey’s respondents in the region have made a higher allocation to private credit investments. This indicates that, for instance, financing affordable housing projects will fit well within both social and impact investing, which seems to be a relatively higher priority for Apac investors.
“The use of private market investments has been a significant part of the Australian institutional landscape for many years, for example. There can be ties between some of the existing investment behaviour and ESG,” Anderson said.