When integrating environmental, social, and governance (ESG) policies into an overall investment framework, it is important for an asset owner to step into both the shoes of the investment team working on its behalf and the companies they invest in.
So says Sophia Cheng, chief investment officer of Cathay Financial Holdings, Cathay Life’s parent company.
“Try to convince people with information and data, and try to motivate people to see the meaning of that, and never go to someone and criticise them without a solution,” she said at AsianInvestor’s 11th Institutional Investment Forum on December 3.
Within the internal investment team, the initial education process took a long time, slowing the integration of these ESG elements.
It’s not difficult to see why Cathay Financial took on the initiatives to incorporate ESG into both their life insurance and banking businesses, which account for 60% and 40%, respectively, of its $300 billion of assets under management.
Amid the growing global clamour to curb climate change, fulfilling fiduciary duties has evolved over the past years from that of simply providing financial returns.
“All the money we have is not our assets, they are [our] liabilities. They are depositors' money, they are policyholders' money. On their behalf, what do they want us to allocate their money to support?” she said.
Internal communication, for one, plays a key part, with the team reporting back on any bottlenecks that might arise when incorporating ESG policies.
“A lot of these non-financial risks can later transfer into financial risks ... Your problem is my problem if I don't solve your problem,” Cheng said.
BNP Paribas Asset Managment's head of stewardship Asia Pacific, Gabriel Wilson-Otto, told AsianInvestor that if ESG is presented as a tool that can enhance alpha generation and risk management, it can be a strong message to help buy-in and commitment from a more traditional investment team.
The same approach can also be applied to Cathay Financial’s investees, whom the company engage with to help improve their ESG standards. Ultimately, doing so help these firms to stay competitive.
“Some companies may not be ideal but if they are making some progress you can help them transition,” she said. Engaging with these companies also means that investors don’t necessarily have to sacrifice investment returns by eliminating the opportunity to invest in them.
“There's a required yield you need but no one asked you to [invest in] super-high-yield [companies] at future risk,” she said.
Cathay Financial is among the companies that have signed up for Climate Action 100+, an investor-driven initiative that helps cut down big corporates’ greenhouse gas emissions. While it is not a signatory of the UN’s Principles for Responsible Investment (because Taiwan is not a UN member), it is a member of the Asia Investor Group on Climate Change.
Now a lead investor in a local group, Cheng said Cathay Financial acts like it's a “TA (Teaching assistant)”.
“We even translate their documents, visit their group subsidiaries, chief executive, and we are visiting their plants in two weeks' time. They know we come from good intentions, we want them to look good, we want them to make progress,” she said.
In Asia and emerging markets, especially, Cheng said investors need to respect the constraints of their governments and corporates.
“Sometimes the corporates know that and they want to improve but they care about face,” she said “[So] I usually don't go there to make them feel bad and [me] look smart. And therefore if we are building a friendship you can really assess their progress and learn what they may want to do next.”
“We never stand in front of a company and tell them, 'We are your shareholder, you do this'. We go there as a friend and [say] we are worried if you don't do this, this might happen to you.'”
While it will require a lot of on-the-ground effort, forging closer ties with companies will eventually allow investors to also influence their investees’ peers, she told the delegates.
Article correction: Cathay Life is not and cannot become a signatory to UN PRI, as Taiwan is not a member of the UN.