By Peter Sherriff , Director, Product Strategy, Asia Pacific
Charles River Development
Across the Asia-Pacific (APAC) region, asset owners in both developed and emerging markets are keen to adopt Environmental, Social and Governance (ESG) investment practices. Whilst the market volatility of 2020 has seemingly slowed this type of investing amongst APAC asset owners, our conversations with industry participants indicates interest in ESG remains strong. Prior to the pandemic driven pause, they were rapidly increasing allocations to ESG mandates according to research conducted by the CFA Institute and United Nations’ Principles for Responsible Investment (PRI) organization. The survey results are supported by actual fund flows and regulatory measures seen across countries in the region, including:
- In Japan, assets managed under ESG strategies rose from USD 7 billion in 2014 to USD 2.18 trillion in 2018. Japan’s Government Pension Investment Fund, the world’s largest single pool of retirement savings, and the Pension Fund Association were early signatories to the Principles for Responsible Investment (PRI).
- Malaysia’s Employees Provident Fund, with USD 204 billion under management and Singapore’s GIC sovereign wealth fund managing USD 400 billion have both recently signed on to PRI. In Thailand, the nation’s Government Pension Fund managing USD 31.7 billion has launched its own ESG scoring tool for screening local stocks and bonds.
- In 2016, 70% of Australia’s largest superannuation funds said they were committed to responsible investment, and 44% reported on responsible investment activity. The latest data from the Responsible Investment Association Australasia notes those numbers have risen to 81% and 72% respectively.
Two drivers in particular underpin this rapid growth of ESG investing among APAC asset owners:
- Increasing demands for corporate transparency are driving the dissemination of timely and accurate ESG data, enabling investors to make socially aware investment decisions. Responsible investing as a part of a long-term strategy can minimise risk/return ratios and is growing in adoption under the premise that sustainability is linked with good financial results. Across APAC, some large asset owners are also becoming “activist investors,” using their considerable financial clout to push the boards of corporations they invest in to become more socially responsible in their business practices.
- The recently launched European Commission Action Plan requires asset owners, insurers and investment managers to disclose how they are integrating ESG factors into allocations and how they are adhering to ESG objectives in their investment decisions. Given the global investment focus of large asset owners, this will eventually impact non-EMEA based funds to varying degrees. Similar consultation processes are currently underway in APAC with the Monetary Authority of Singapore, Securities and Futures Commission in Hong Kong and the Australian Prudential Regulatory Authority as examples.
Where particular countries find themselves on their economic evolution typically determines which of the three ESG factors are prioritized in their long term investments, beginning with governance, then social and finally environmental.
In our discussions with asset owners, conversations increasingly focus on how to integrate ESG factors into asset allocation and investment decisions. While there is no “right” way to proceed, industry practitioners generally agree that the foundation of a viable ESG program consists of research, security and portfolio analysis, and investment decision making informed by that research and analysis.
Research entails sourcing and aggregation of data from multiple sources, including regulatory and shareholder reports and third-party investment research. State Street Global Advisors®’ (SSGA) innovative Responsibility Factor (R-Factor™) measures the performance of a company’s business operations and governance as it relates to financially material ESG challenges facing the company’s industry.
R-Factor scores draw on multiple data sources and leverages widely accepted, transparent materiality frameworks from the Sustainability Accounting Standards Board (SASB) and corporate governance codes to generate a unique ESG score for listed companies.
Security and portfolio analysis involves assessing financial and ESG factors on the investment performance of a firm, sector or portfolio to forecast valuation multiples, credit quality and other quantitative performance metrics. State Street’s truView® risk analytics platform helps asset owners assess the ESG risk/return profile of their portfolios to better inform investment and de-risking decisions, and to provide ESG-related reporting required by their investment boards
Investment decision making based on this analysis then drives allocation decisions, buy/sell decisions and portfolio weighting. As ESG-driven investing gains traction with asset owners globally, investment processes will change, from security selection, portfolio and risk management through to asset allocation and compliance. Given the prevalence of externally managed assets amongst APAC asset owners, manager selection is also a key requirement for ESG-focused organizations. Running ESG analysis over current or proposed external manager selections and their portfolios can help ensure the ‘whole of fund’ maintains the desired focus even when asset management is being outsourced.
Firms with the requisite technology platforms in place will be well positioned to serve their investors and stakeholders by providing transparency into ESG factors driving investment decisions.
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