Why Asia-Pacific asset owners are ahead of their US, EU peers on ESG

Asset owners in Asia Pacific (APAC) are ahead of their global peers in terms of incorporating active ownership as part of a comprehensive environmental, social, and governance (ESG) strategy.

 According to a survey by State Street Global Advisors (SSGA), about  80% of APAC asset owners have some level of ESG engagement with the companies in which they invest, compared to 70% in the US and 58% in Europe, Middle East, Africa (EMEA).  About 85% APAC asset owners in Asia- Pacific now have an ESG component in their investment strategies, according to the survey which covered 475 institutions globally.

“The survey results demonstrating a large percentage of asset owners in APAC are incorporating active ownership into their ESG programs are very exciting, given the positive governance outcomes that this can create. As more investors appreciate that their financial return objectives can sit comfortably alongside encouraging positive change through promoting ESG factors in their investments, we would expect the overall percentage of ESG exposed assets to increase,” says Kevin Anderson, head of investments, Asia Pacific at SSGA.

In previous years, ESG investing involved the question of whether the asset owner was foregoing returns by excluding certain sectors. But ESG investing doesn’t mean excluding whole sectors from a portfolio.

“This is a more recent evolution in how we invest using an ESG strategy. Asset owners have found that they can do well with an ESG investment strategy,” says Anderson.

About 70% of respondents from the region said the integration of an ESG strategy has significantly improved returns, while, 74% said pursuing an ESG strategy has helped with managing volatility.

“This is an indication that asset owners are using ESG strategies to enhance investment performance. There’s a collective shift in the institutional investment world right now that has asset owners and managers thinking differently about the full implications of their investments. For the majority, the question is no longer, ‘should we consider ESG as part of our mandate,’ the question is ‘how are we actively pursuing opportunities with our investments that help us reach our financial goals while encouraging change in the process,” Anderson says.

Despite the increased adoption, the proportion of a portfolio’s assets with ESG exposure remains low. This is especially noticeable in APAC where only 19% of respondents have more than 50% of their assets exposed to ESG factors and 43% percent have less than 25%.

The survey findings point to cost (59%), limited demand from stakeholders (52%), unclear value proposition (52%), as well as lack of internal knowledge and capability (52%) as top challenges inhibiting greater ESG adoption in APAC. Globally, nearly two-thirds of respondents (57%) say it’s difficult to benchmark performance against peers. About 56% said the accurate assessment of external ESG asset managers was a key issue.

Nevertheless, the large majority of APAC asset owners (90%) aspire to go beyond just negative screening to achieve fuller ESG integration in the next two years.

 “In the last four or five years, we’ve seen a marked increase in the level of awareness and interest in ESG at the institutional level, which is extraordinarily promising. There’s a broader appreciation of the notion that good governance translates into better management of areas such as a company’s carbon footprint, as well as how management engages with the workforce. The companies that operate this way, we believe, are better quality investments that yield better performance long term,” Anderson says.

The 475 asset owners surveyed were from the UK, France, Germany, Italy, Switzerland, Nordic countries, the Netherlands, Korea, Singapore, Japan, China, Hong Kong, Australia and the US. Respondents included public and private pension funds, endowments, foundations, family offices, sovereign wealth funds, central banks, and supranationals. The survey was conducted in December 2016 and January 2017.