Elevating ESG: Can Asia rise to the challenge?

Asia may stand to benefit the most from a greater focus on ESG (environmental, social, governance) investing with particular gains to be made in tackling environmental challenges, but its investors are still largely in the dark when it comes to sustainable investing.

In a survey conducted by Asset Benchmark Research (ABR) in July 2017, six in every 10 investors are ignoring ESG factors in their investment decisions.

According to the report, which canvassed the views of 250 asset managers in the local currency bond markets, 61% are sticking to traditional metrics of assessing investee entities, focusing mostly on tangible measures of a corporation’s value, such as profits and sales growth. A large minority (46%) have no plans to use ESG standards in the near-term.

The region is blighted increasingly by environmental challenges despite basking in the glow of being the world’s fastest growing region. Long-term, the future is dim in terms of health costs and the severe and often irreversible damage to the environment.

Photo: Singapore, September 8 2015, haze fills the downtown area, caused by the forest fire and plantation burning in Indonesia. Credit: Pumidol/Shutterstock.

Globally, there are US$22.9 trillion of assets managed under responsible investment strategies, a 25% jump from 2014, according to the biennial review of the Global Sustainable Investment Alliance (GSIA), an organization that focuses on sustainable investments. In a sign that sustainable investing is already a force across global financial markets, GSIA said responsible investments now stand at 26% of all professionally managed assets globally.

Asia trails the rest of the world. Its ESG-related investments, despite the buzz around sustainability, represent a measly 0.2% of total investment. This compares with 53% in Europe (US$12 trillion), followed by the US with 38% (US$8.7 trillion).

The problem runs deeper. In the ABR survey, most cite the lack of a company policy around ESG investing as the main reason they have not factored ESG principles into investment decisions. Insufficient qualifying ESG investments is another concern among Asian credit investors. “My portfolio is composed of Philippine peso-denominated bonds, both government securities and credit. The Philippine debt market has very limited ESG-qualified instruments,” says a fixed income portfolio manager at an insurance house headquartered in Manila.

A Jakarta-based trader at a local bank suggests the costs to companies of promoting ESG may also outweigh the benefits. “ESG factors are not yet a thing in the Indonesia bond market. Putting this into consideration will carry more cost into the business. But they will probably implement those at the right time in the future,” he adds.

There are still many sceptics that struggle with ESG’s value proposition. “It is not clear the extent to which ESG drives asset prices,” says a senior portfolio manager in Singapore.

Others are sold on the governance aspect, but have less faith in social and environmental measures. “Our belief is that good governance leads to better financial performance. Environmental and social factors are less material,” says a Malaysian ringgit bond investor.

Environmental regulations are raising awareness about the importance of ESG as a metric to investments, but probably not enough to drive investments based on ESG principles. Across the surveyed Asian markets, Indonesia lagged most markets in terms of ESG adoption.

Fifty-five percent of Indonesian respondents have reported that they are not currently involved in ESG strategies and none of these managers plan to be involved in the next two years. A fixed income head based in Jakarta suggests regulations could make a difference. “We need support from the regulators to make it [ESG investing] work,” she says.

Asia also requires education when it comes to sustainable investing. In India, the majority (73%) of fund managers ABR surveyed are not adopting ESG factors into investment decisions currently. There is a lack of practical benchmarks on ESG, investors say. “ESG is a new concept here and it is still in a discussion mode. Regulators are working on it,” a fund manager explains.

However, although ESG investing in Asia is still a small segment of the broader investment universe, it is growing. In 2016 China led the world on green bonds, raising US$30 billion from fixed income investors that want exposure to ethical projects. India was seventh-largest issuer.

Real money accounts, such as pension and endowment funds, are also including ESG as part of third-party mandates. Portfolio managers could be the recipients of the flow of new money by a shift of their investment policy to reflect ESG factors.

Further change may be afoot. In Malaysia, Singapore, Thailand and the Philippines, some fund managers are responding positively to ESG investing. “From historical data, it is evident that it [ESG investing] can provide a better risk-adjusted return over the medium horizon,” says a Hong Kong-based CIO of a local fund house.

A head of fixed income investing in Indian rupee bonds also makes the case. “Companies that maintain higher standards of ESG are expected to have more sustainable business models,” he says. “These factors rank high in the analysis of an investee company”.

The survey on ESG is part of the Asian Local Currency Bond Benchmark Review, an annual survey of local currency bond investors in the region led by ABR. The ESG topic has been introduced in this year’s review in support of The Asset Corporate Awards that opened for submissions last month.

Now on its 17th year, the awards have evolved, over time, into a platform of meaningful exchange on ESG where participating corporate could immerse themselves in ideas and insights. Experts on the topic are featured on our articles and findings on the latest survey on ESG.

 To learn more about the Asset 12th Asian Bond Markets Summit, please click here.

 

Date

16 Aug 2017

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