Taiwan’s Cathay Financial Holdings and the Canada Pension Plan Investment Board (CPPIB) see more value in engaging with investee companies rather than divesting, said senior executives at the two asset owners.
“I feel sad that the whole world labels high emitters as guilt or something evil,” Sophia Cheng, chief investment officer of Cathay Financial Holdings said during a panel discussion during the first day of the Financing Climate Change virtual conference on Monday (June 21) hosted by FinanceAsia, AsianInvestor’s sister publication.
“If [companies] know how to do transition, they will change. So the main purpose of engagement is to change the investee company, rather than to kill them or make them disappear,” she said.
"We don't start with a bias that high emitters are bad, or high polluters are bad, they need to know and they need to learn that if they don't make a change or transition, they have no future," she said.
For Cathay, engagement involves educating investee companies about the costs of environmental, social and governance (ESG) issues such as carbon emissions, water, as well as “behaviour and controversial issues”, Cheng said. They then take learnings from past experiences as well as global ESG leaders and apply successful methodologies to their investee firms.
Cathay also keeps tabs on companies to check on their ESG progress regularly.
“Every two years, I need to assess how the corporates are doing – do they do [what they promised] and are they serious? They need to know there's no room for them to play around with investors saying they care and then do nothing,” Cheng said.
However, Cathay does have a line. It “basically hardly invests” in “more controversial companies”, and instead focuses on working with firms that do show interest and commitment to transition – even for carbon-intensive industries such as utilities.
“This month, the Asian Investor Group for Climate Change (AIGCC) – we just launched the Asian utility engagement program,” said Cheng. She was referring to the programme involving 13 investors with $8.8 trillion assets under management working with five utility companies in Greater China, Japan and Malaysia to cut emissions and improve governance of climate-related risks.
“So you will notice that ‘Wow this company I invest in is actually a company people will be engaging with very aggressively’. And you will think about what do I do? Do I help them to transition or if they are very reluctant to change, will I be forced to divest? So this is very important,” she said.
At CPPIB, head of sustainable investing Richard Manley believes that ESG goals will be introduced in regulations in the next three to five years, which will require companies to transition sooner rather than later to adapt to the new economy.
“If that is the operating environment we're transitioning to, if we now need to assimilate the mindset, that within three decades, we will be living, operating and investing in a net-zero economy, we need to anticipate what that will mean for access to capital,” Manley said at a separate session during the event on Monday.
“If companies seek to preserve the broadest possible access to capital, and the lowest cost of accessing capital, we believe that companies over the years and decades ahead, will need to demonstrate that they are able to transition, at least in line with if not ahead of the transition pathway for their specific industry,” he said.
For now, as investors, CPPIB puts its largest investments through pre-investment diligence in scenarios where global temperatures rise two degrees and four degrees to measure transition and physical risks.
“We integrate those insights into not only the investment decision, but the asset management strategy for those particularly private assets where we have more governance rights. But above that, our position is that once we own a company that we've identified as having a pre-determined level of transition risk, we engage with the board and engage with the executive team to work out how they can mitigate that, and how they can seek to transition the business as they move forward,” he said.
As investors become increasingly concerned about sustainability, there are concerns that ESG-friendly asset prices will rise and become overly expensive.
“If you have such abundant global liquidity chasing a very limited number of names, then I do think that there could be a risk in the future you may overpay for sell the company at least temporarily,” Cheng said. “So exercise the proper logic above sustainability. It's very important it's not just a fashion buying [exercise].”
In terms of fixed income, however, there has not been evidence of ESG putting pressure on prices, Kheng Siang Ng, Asia Pacific head of fixed income at State Street Global Advisors said at the same panel as Cheng.
“Now, of course, there are some of the issues – because we have more demand and supply, especially on the green financing on the fixed income side – so naturally, you may see slightly tighter pricing. But again, it hasn't continued to be very expensive,” he said.
That said, there has been growing evidence that ESG ratings can lead to better performance, but Cheng believes there is not enough long-term evidence to definitively prove it.
“There is some confusion today… that better ESG equals better share price, which I think needs a longer term to prove,” she said.
“Over the past three years, investors have made a common effort to reduce or avoid lousy ESG companies, or companies with very good earnings that just don’t bother to disclose. My interpretation as an investor is that I’m making the outperformance to make the poor ESG company perform worse so that there is cost and result," she said.