At the beginning of every Chinese New Year AsianInvestor makes 10 predictions relating to economic, geopolitical or investment issues that will affect how investors make their major decisions. Then, at the end of the year, we look back to how accurate these predictions were.
Our fourth look back at our Year of the Pig predictions focused on whether the region's institutional investors would begin to more assertively use environmental, social and governance (ESG) criteria when it comes to investing.
Will Asian asset owners treat ESG as more than a box-ticking exercise?
Answer: No (mostly)
As the bushfires in Australia appear to underline, the consequences of rising global temperatures can be catastrophic. The worry is that incidents of mass fires, water scarcity and increased storms will only mount as the world gets hotter over the coming years and decades.
Asset owners have increasingly been seen as playing an important role in this, given their outsized hold on the assets of companies that are largely responsible for climate change, or in a position to do something about it. In addition, institutional investors can also help push through progressive ideas of social diversity and fairness, and stand up for good corporate governance practices – collectively, the idea of environmental, social and governance (ESG) practices.
The arguments for investors taking ESG seriously are numerous, from the fact that doing so astutely can arguably improve asset returns over the long run to the moral imperative of trying to avert a global climate catastrophe. Unfortunately, relatively few Asian asset owners have been at the front of such efforts.
We predicted that this was unlikely to change in 2019, and that calls for greater ESG might lead to more talk, but little real change in behaviour. This was broadly correct. While the United Nations Principles for Responsible Investing (UN PRI), a body that represents pro-ESG investors, gained some more Asian asset owner signatories – including Thailand's Government Pension Fund and China's Ping An Insurance – there were few signs of other investors committing whole-heartedly to ESG investing.
Instead, the region has a selection of true advocates, such as Japan's Government Pension Investment Fund, New Zealand Super, some Australian superannuation funds like Hesta and Commonwealth Superannuation Corporation, Kwap of Malaysia. Many additional asset owners have declared their interest in ESG and some have committed some investment mandates towards ESG but relatively few have yet to fully instill the concepts into their investment processes.
However, momentum appears to be heading in the right direction. A Cerulli Associates survey of Asia Pacific asset owners in late 2019 found that over 80% thought ESG integration (an investment approach that measures companies by a set of ESG criteria) was important, and almost 75% require asset managers to document their ESG approach. This is mostly in equities however, where nearly two-thirds said they were keen to deploy ESG strategies.
In addition, more asset owners are actively declaring their subscription to the ideas. Ping An was China's first asset owner to sign up to PRI, but it will hopefully be followed by others. Meanwhile Hong Kong-based AIA signed up too, offering an example to the region's life insurers. And the likes of GIC and Temasek of Singapore are known to be studying the concept of ESG too.
But it will require many more leading asset owners to publicly commit to reducing the carbon emissions of their investment portfolios and extol the merits of ESG if Asian investors are to fully play their part in combating climate change.
Previous Year of the Pig reflection articles: