Finding value in sustainable finance despite the challenges
Evaluating the positive growth of sustainability within Asia
FROM green bonds to sustainability-linked loans, there is little doubt that Asia’s embrace of sustainable financing and ESG (environmental, social, and governance) principles has grown at a rapid pace over the last several years. Despite the positive sustainable steps taken by companies and ESG commitments from investors in Asia, the region still lags behind others globally when it comes to embedding ESG into everyday practices, according to a panel of experts discussing sustainable finance at The Asset’s 14th Asia Bond Markets Summit held in Singapore.
Looking at data from HSBC’s annual survey of investors and issuers in Asia, only 20 percent of survey participants were looking at sustainable practices compared to the global average of 40 percent. Moreover, just half of Asia-based participants believed that climate change would be a meaningful factor in their business in the next decade compared to 70 percent globally.
“Awareness in Asia is coming off a lower base, but it’s growing fast,” says Sean Henderson, co-head of debt capital markets, Asia-Pacific at HSBC. “Companies need to address what ESG will mean for their business going forward, and not just think about it in terms of a green bond, but establishing a green framework can help demonstrate focus to investors.” While structuring and creating a framework for a green or sustainability bond can understandably be a daunting task at first, Henderson believes that it can also help shed additional light on the ESG impact of the business for management, while helping broaden the understanding of the topic within the company.
Looking to embrace ESG principles is also something that panelists were eager to expand on in the coming years. “What has changed from 3-4 years ago is that we have taken a bold decision to go mainstream with ESG. We defined a sustainability framework and incorporated it within our process and research across all of our projects and existing range of products,” shares Jean Louis Nakamura, chief investment officer at Lombard Odier. In addition to helping with the overall process of funding green and impactful projects or assets, ESG is also being seen as a competitive advantage for some asset managers.
“ESG, which was once optional before, has become a necessity within the investment manager community. There is a decent amount of pressure coming from institutional investors in Europe, the United States and Asia that we need to be compliant with ESG standards,” explains Diwakar Vijayvergia at AllianceBernstein. “For us ESG is also something that is engrained into our risk and reward processes and how we deal with a company’s management and stakeholders.”
Adopting ESG investing doesn’t mean immediately excluding companies that don’t adopt ESG practices. Instead it is about engaging with those companies and seeing what can be done to improve their processes. “One thing we are cautious about is setting too high a benchmark, particularly here in Asia where we risk shutting off the market before it even starts,” highlights Henry Loh, investment manager – Asian fixed income at Aberdeen Standard Investments. “We try to balance that line of having a good benchmark or at least aspirational goals but at the same time working within the confines of the local context.”
ESG investing benchmarking nevertheless has become a challenging proposition as there are still no universal standards on what it means to be ESG compliant unlike the policies for green bonds or sustainability-linked loans which are defined respectively by the ICMA (International Capital Market Association) and LMA (Loan Markets Association). ESG investors often agree on doing something ESG positive but often disagree on how to achieve that.
This challenge is similar to that experienced by the Islamic finance market when it was starting up with Gulf Cooperation Council (GCC) countries having different interpretations of shariah-compliant structures and assets. “It took years to get that kind of conformity in the Islamic finance space. What is happening in Islamic finance is that key funds or pension funds are actually telling us to share our definition of shariah compliance and using that as a starting point for discussion,” reflects Dato’ Paduka Syed Mashafuddin Syed Badarudin, chief executive officer at Principal Asset Management.
Several members of the panel recommended that firms such as rating agencies should be the ones applying an overall ESG score to companies rather than evaluating the individual green bonds they issue. “These credit rating agencies have been in touch with the corporates for a fairly long period of time, they know the business and they can globally map these ESG standards,” suggests Vijayvergia.
The overall idea is that all bases are covered when evaluating the ESG worthiness of the company. “It’s not just about green bonds, as that’s just a small part of the picture. It’s also about improving ESG disclosures across the broader economy so that investors can make sensible investment decisions. Investors will benefit from independent third parties with specialist expertise on the topic, but in time these shouldn’t just be looking at providing just green bond ratings, but at all issuers of debt,” highlights Henderson.
The availability of creditable ESG data itself was a concern for some investors at the event with Loh suggesting that financial regulators should play a role in requiring corporates to report their ESG impact. “Before we can even talk about the comparability of different ratings, the one basic datapoint that is missing is simple data, for example, getting companies to say how much carbon emissions they have,” he says.
This standardization across different ESG ratings has significant upside potential not only for active investors but also for passive investors who need clear weighting and measurements to create an index. “Everyone has an ESG strategy but it is not standardized in a sense that everyone is looking at it slightly differently and incorporating different datapoints and different viewpoints and from a passive indexing perspective, there is obviously a big challenge in terms of having enough standardized data,” shares Randolf Tantzscher, executive director – indices at IHS Markit.