Whether 2020 turns out to be a breakthrough year or not for environmental, social and governance investing remains unclear, given the many challenges that remain. 

But one thing is clear: Asian institutions, much like their global peers, are likely to come under increased scrutiny in 2020 over their ESG records.

With climate change at the top of the agenda as pressure group Extinction Rebellion's global profile grows, some experts in the field sense a sea-change in attitudes within the investment community.

“In 2019 we have witnessed a profound shift in awareness of, and engagement in, the climate crisis," Saker Nusseibeh, chief executive at UK-based ESG specialist fund manager Hermes, said in his latest review of ESG investing.

Investors are increasingly taking a longer-term view and considering a broader set of risks, such as climate change, in the context of their asset allocations, Nusseibeh said.

Russell Clarke, VFMC

That's fine in theory but the reality is that, even for reasonably sophisticated investors, climate investing is still an inexact science.

The challenge for asset owners, according to Russell Clarke, chief investment officer of Melbourne-based Victorian Funds Management Corporation (VFMC), is to identify how to reduce their carbon footprint and assess the most effective ways they can make an impact.

The Australian state investment fund is not a newcomer to the ESG investing world. It has been a signatory to the UN-supported Principles for Responsible Investment (PRI) since 2007 and is an active member of the Investor Group on Climate Change. Earlier this year it was named as one of Asia's Responsible Investing Leaders.

VFMC has identified areas where it can make the most impact, and in many cases, this is by putting pressure on their external managers, Clarke said.

“We can do things directly; we can measure certain exposures and we can decide to use certain strategies and not others. But because of the multiplier effect, the biggest impact we can have is spending time with our underlying managers – over 100 different portfolio strategies – and getting them to do more,” he said.

“That’s often the thing that gets overlooked," Clarke added. "We can influence a lot of other investors that way and have a much more meaningful impact from a carbon footprint perspective.”

MEASURING THE CHALLENGE

The initial challenge for any investor is to try and get a clear idea of what climate change exposure they have in their portfolio.

“There’s a lot of modelling going on,” said Clarke. “Particularly across a complex multi-asset portfolio and a range of investments that are not just straightforward. That’s not an easy thing to do and we are still at the fact-finding phase, trying to get better quality reporting.”

Large asset owners, with a few exceptions such as NZ Super, are still struggling to measure their carbon footprint. Clarke said VFMC had made some initial assessments, “but we are not happy with the quality of the data. It’s still quite sketchy in a number of areas”.

He said investors are still grappling with things like what level of emissions to look at and whether to measure carbon footprint or carbon intensity.

“Until the industry lands on a bit more standardisation, it’s hard to be too explicit. So we are trying to line things up directionally to improve what we do in the climate space, but it’s hard to set certain targets until we have better data and clearer standards,” Clarke said.

SASB THE STANDARD?

Rakhi Kumar, SSGA

According to analysis issued this week by State Street Global Advisors, the Sustainability Accounting Standards Board (SASB) will emerge in 2020 as the leading global ESG disclosure framework.

Rakhi Kumar, head of ESG investments and asset stewardship at SSGA, said that, as of the third quarter, there was a 150% increase in the number of companies reporting against SASB compared with the previous year.

“While absolute numbers of SASB reporting companies are relatively low, at just above 100, we expect SASB to emerge as the preferred standard for investor-relevant sustainability disclosure in 2020.”

Their reasoning is that, unlike other sustainability reporting frameworks, “SASB focuses on metrics that are financially material to investors, establishing a baseline standard of expectations for disclosure, and offering clear guidance to companies.”

VFMC’s Clarke said “I hope they’re right – the more work that’s done on this the better. We are still trying to report to a TCFD (Taskforce on Climate-Related Financial Disclosures) framework and that will be helped by more disclosure along those lines.

State Street said the SASB’s standards can play a valuable role in investors’ implementation of their TCFD commitments, as a framework for climate metrics reporting. “The ongoing work between SASB and TCFD will support further adoption of SASB.”

LIMITED CHOICE

Another area where the climate investing community struggles is with the current choice of climate and sustainability investments.

While some institutions, such as Japan’s Government Pension Investment Fund, regard the purchase of green, social and sustainability bonds as one of the direct methods of ESG integration in its fixed income investments, Clarke observed that there is still a limited availability.

“We are a long way from having a mature range of those kinds of investment,” he said.

However, he felt that investors should consider the wider issue.

“This is not about finding green bonds, although they have their role to play, but about influencing behaviours and making an impact in a much broader sense,” Clarke said. “The bigger impact might be having more investment managers who do a really good job on climate in different asset classes. So it’s not just about investing in green bonds and renewable energy.”