In line with the unprecedented growth in public awareness and interest in ESG issues, investors are ever-more vocal about wanting to see their capital foster positive sustainability practices.
For portfolio managers, this means assessing corporate behaviour, for example in terms of diversity at board level and inclusivity in the workforce. From the perspective of fund selectors, meanwhile, the focus is on how fund houses embed diversity into their culture and investment processes.
These were some of the key take-aways from the first panel discussion, The seismic shifts and trends to watch, held at the recent Global ESG Summit hosted by ESG Clarity in partnership with the United Nations Capital Development Fund.
“A lot of the earlier discussions [about ESG] seemed to sit with governments. Now, companies and, increasingly, private individuals, are taking responsibility for achieving alignment of investment goals alongside the world moving in the right direction,” said Julie Koo, head of Citi investment management sales in Asia Pacific.
This reflects the growing expectation among investors that their philosophies are reflected in the funds made available to them and in the portfolios that fund selectors build for them.
“Investors are more willing to say that if the investment doesn’t reflect their beliefs and values, then they are not willing to hand over fiduciary duty,” said Isaac Poole, chief investment officer at Oreana Financial Services.
This dynamic has become more acute partly in response to the fact that the physical effects of climate change are more apparent than ever – such as the Australian bushfires in early 2020, the severe droughts in Latin America and the freeze in Texas.
Furthermore, said Abbie Llewellyn-Waters, head of sustainable investing at Jupiter Asset Management, the humanitarian crisis arising from Covid-19 has unveiled deep fragility around the inclusivity of the world’s economic framework.
“How companies respond to these systematic changes will be critical,” she explained. “Investors are aware that their capital has a role to play, so we, as allocators, need to think about the effect a company’s product on the planet and people.”
Regulators also need to play a bigger part. By giving greater clarity about what constitutes a “sustainable” fund, investors will garner more comfort about the impact they can have.
The need for this in Asia is pressing, said Paul Milon, head of stewardship for BNP Paribas Asset Management in Asia Pacific, given that the level of penetration into ESG funds is still relatively low despite the surge in interest and flows over the past 18-to-24 months.
“More and more regulators in Asia are looking at this issue. Hopefully, this will lead more money towards sustainable solutions,” he said.
In Koo’s opinion, financial institutions also need to play a more significant role. She said that the low base from which capital allocations to ESG have grown suggests a lot more education is needed, followed by discussions on how to implement solutions.
Driving corporate diversity
In the meantime, corporate behaviour will remain under the microscope of many asset managers.
According to Llewellyn-Waters, a balance of all stakeholders is critical. “Aside from a low-carbon portfolio, social factors are sometimes overlooked within the ESG landscape.”
In addition to the direct impact of the company’s products, she sees an opportunity in terms of supporting efforts to reduce social inequalities. This can be seen by her fund’s strong structural allocation to preventative healthcare, such as vaccines, diagnostics and related equipment.
From a diversity standpoint, she looks beyond board representation to inclusivity within the workforce in terms of gender and race. Important factors include policies for parental leave and internal promotions, and the extent to which companies support such policies.
Ultimately, companies with more sustainable practices can help deliver better performance, added Milon.
Evaluating asset managers
When it comes to fund selectors reviewing their external managers, meanwhile, culture is a good indicator of commitment to ESG.
“We think about people, philosophy and processes as good ways to frame the diversity and culture story [of fund managers],” said Poole.
The pandemic has also added a new dimension, said Koo, in terms of retention rates of key talent and support shown to staff in a difficult and changing environment.
“As we consider how we build out our sustainable investment platform, we look at how our asset managers embed diversity into their overall culture, and at whether the people involved in the process believe in what they do, rather than take a tick-the-box approach,” she explained.
Data and demand
The second panel, Data and stewardship: Navigating the pitfalls, discussed the use and limitation of ESG data providers. “In ESG there isn’t yet a one-size-fits-all framework,” said Edris Boey, head of ESG research at Maitri Asset Management. Similarly, what each company is trying to ‘solve’ or improve when it comes to ESG or sustainability might be different, added Andy Howard, global head of sustainable investment at Schroders, also adding to the difficulty in rating them.
Boey went on to add that sometimes Chinese companies only have disclosures in Chinese and this is why they are not picked up by mainstream data providers, rather than because they have lower ESG credentials. Nevertheless there are some shortcomings in long-standing data providers, said Iain Richards, head of global responsible investment policy at Columbia Threadneedle Investments.
The final panel, Satisfying demand: ESG investment solutions, looked at where Asia is on its ESG journey compared with other regions, with Kanol Pal, senior adviser, responsible investments at BNP Paribas Wealth Management saying regulation, leadership from pension funds and increased awareness are the main drivers for the increased demand for sustainable investing in Asia. Covid’s also had a big part to play in spotlighting corporate behaviour, added Yvonne Leung, head of managed solutions Asia at JP Morgan.
ESG investing in Asia is starting later, said Anne-Laurence Roucher, deputy CEO, head of development, finance, and operations, Mirova, but is moving much faster overall. This creates opportunities, said Preyesh Patel, senior ESG analyst, Franklin Templeton Emerging Markets Equity at Franklin Templeton.
The full Asia-focused event can be viewed after free registration. The US-based and the UK/Europe-based event also are available on demand.