Asset owners in Asia are increasingly looking to use environmental, social and governance (ESG) principles in their portfolios, but the progress of participation is stubbornly slow and will likely require internal champions to advance it faster, admit institutional investors and advisers.
The interest of institutional investors in the region remains largely piecemeal. Asset owners are mainly assigning specific investment mandates instead of including ESG principles across entire portfolios.
Helena Vines Fiestas, head of sustainability research at BNP Paribas Asset Management, told AsianInvestor this approach is understandable.
“If you look at ESG in Europe, from 2000 to 2015 it was a niche area, centred on socially responsible investing” she said. “After the financial crisis [of 2008] corporate governance became more important, but only over the past two or three years has it really gained prominence across entire portfolios.”
Mitch Reznick, co-head of credit and credit research at Hermes Investment Management, frames ESG maturity in Asia as a slope. “If you have GPIF [with a full ESG portfolio approach] at the top, most Asian asset owners are closer to the bottom but many want to make the steep climb to improve their sophistication,” he argued.
Improving ESG engagement typically requires a senior internal advocate; an executive who genuinely believes in the merits of implementing ESG and is willing to take champion it to the organisation and its stakeholders of this. Mizuno has played that role in GPIF, for example.
Another important step is public awareness. If populations at large better understand the principles of responsible investing, they are more likely to ask pension providers and governments to install them. Hiromichi Mizuno, chief investment officer of Japan's Government Pension Investment Fund (GPIF), says this partly explains the orgnaisation's big mandates.
“In terms of public awareness of ESG, Japan should be ranked the highest in the world at the moment,” he told AsianInvestor in an interview.
The maturing of millennials, who are typically quite socially and environmentally conscious, is a boon to this. Tsay Feng-ching, the director general of Taiwan's Bureau of Labor Funds (BLF), told AsianInvestor the pension fund is engaging with ESG because younger people in Taiwan believe in it.
“When [younger people] make consumption, they care a lot about environmental issues and social justice,” he said. “This is a consumption behaviour that most people have not noticed but I think this consumerism will prevail in the coming one or two years.”
But this needs to be wedded to political and regulatory action to be truly effective.
Once a government insists companies report their carbon emissions—as France did in 2015—or tells sovereign-affiliated funds to press companies to reduce water consumption or pollution, it would have an immediate impact on investing.
Many governments have focused on corporate governance but few have promoted ESG investing.
Take Hong Kong. The territory is an international financial centre alongside Singapore and its Securities and Futures Commission gained plaudits for implementing a stewardship code in March 2016. But the government hasn’t asked the Mandatory Provident Fund Authority (MPFA), which oversees its defined-benefit pension funds, to have fund providers incorporate ESG principles or even offer ESG-friendly funds.
“We have this compliance mindset, but in terms of embracing proactively new ideas or major changes, it is harder,” admitted Lau Ka Shi, managing director and chief execuive officer of BCT Group, an MPF fund provider. “That’s why if it’s driven by regulation or policy, the development [of ESG] could be faster.”
There are some encouraging signs in Asia’s largest economy. China’s government specifically targeted improving the quality of the environment in its 13th five-year plan, while the China Securities Regulatory Commission is preparing to demand mandatory information disclosure from 2020; UN PRI has suggested it include ESG criteria. That would help ease a key challenge in the country—accessing quality data.
It is also causing more interest among asset owners. Nan Luo, head of China at UN PRI, told AsianInvestor the National Commission for Social Security Funds, China’s main state pension operator, recognised the need for ESG.
“At a working and general level they support the concept, and feel it’s beneficial for society, but putting it into practice will be a matter of time. I think it needs somebody who really pushes it inside the organisation,” she said. She hopes one of China’s insurers will become a UN PRI signatory within the next year.
While the progress of ESG is slow, it should keep building. As more asset owners are beginning to appreciate, it’s wise to better understand the risks of the companies in which you invest.
Ernest Chan, Jolie Ho and Joe Marsh contributed to this story.
Click here to read the first part of this feature, which was originally published in the April/May 2018 edition of AsianInvestor.
This story has been amended to clarify the job title of Lau Ka Shi of BCT Group.