Keith Lee, WWF

Editor’s note: This article was first published on Fund Selector Asia.

WWF’s 2021 report on responsible investment (RI) practices, released today, highlights opportunities for Asian asset managers to improve transparency about their ESG activities and to reinforce their active ownership practices.

Asian asset managers fulfil just 43% of the WWF’s RESPOND (Resilient and Sustainable Portfolios that Protect Nature and Drive Decarbonisation) criteria, suggesting their portfolios may be at greater risk from climate change and natural capital loss. This is compared to Europe’s asset managers, who fulfil an average of 72% of the criteria.

“Currently there is a wide gap between the responsible investment practices of European and Asian asset managers,” WWF’s senior vice president of Asia sustainable finance, Keith Lee, co-author of the report, told FSA.

“We hope the report sparks a race to the top for Asian investment managers, through aligning their objectives with the UN framework to reduce the pace of climate change [limiting the global temperature increase to 1.5°C above pre-industrial levels] as set out in the 2016 Paris agreement,” he said.

“By doing so, they should also make their portfolios more resilient to climate-related risks,” he added.

WWF, a conservation organisation active in around 100 countries, has worked with the finance sector for a decade to integrate ESG risks and opportunities into mainstream finance.

RESPOND 2021 examined the performance of 30 asset managers across a six-pillar framework: purpose, policies, processes, people, products and portfolio. The report includes analysis of the public disclosures of eight asset managers headquartered in Asia — including five Japanese firms, China Life Asset Management and E Fund Management, as well as Singapore-based Eastspring Investments — together with 22 European asset managers with operations in Asia, such as ASI, Fidelity, HSBC, Pictet, Robeco, Schroders, and UBS.

“The purpose of the report is not to rank firms for their responsible investment practices – which would involve weighting factors and so be subjective — but to provide a resource for asset owners and managers, and the region’s regulators,” said Lee.

Nevertheless, among the regional home-grown asset managers, Japanese asset managers are leading the pack when it comes to responsible investment practices, according to the report.

On the other hand, neither of the two Chinese asset managers disclose information regarding their engagements with investee companies over ESG issues, and only four of the Asian asset managers (all Japanese) disclosed their roles in collaborative engagement initiatives.

Of the Asian asset managers featured, only one reported support for ESG resolutions and just two disclosed their full proxy voting records.

As ESG integration becomes the norm in asset management, expectations from asset owners, regulators, and civil society, including those in Asia, for asset managers to better address climate change and nature loss will keep growing, according to Lee.

“Consequently, Asian asset managers will need to step up their ambitions and practices to match current best practices in responsible investment,” he said.

In particular, they should integrate ESG issues in their bilateral engagement processes with portfolio companies, and participate in collective engagements and disclose the role they play in these collaborative initiatives.

WALK THE TALK

Taking the group as a whole, all asset managers acknowledge their role in driving sustainable development and 29 have published general RI, engagement and voting policies. Twenty-nine of them carry out research to identify ESG trends, apply ESG screening and monitor the ESG performance of portfolio companies, according to the report.

However, “despite a high level of a stated commitment to incorporating climate change factors in their investment processes, there is insufficient follow-up with their portfolio companies’ disclosure policies and not enough pressure put on them to set science-based targets for decarbonization,” said Lee.

The report found that 97% of the asset managers integrate climate change into their investment decision-making processes, yet only 20% expect portfolio companies to align to the Recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

For instance, only 23% disclose fossil fuels sector policies with thresholds to exclude companies deriving substantial revenues from operations in these industries.

Moreover, just 10% require these companies to set science-based targets for decarbonisation.

All 30 asset managers define who has oversight of responsible investment and its implementation and have dedicated ESG specialists in their teams, “but there is lots of room for improvement in governance, incentives, and the formalisation of key performance indicators (KPI), especially among senior personnel and board directors,” said Lee.

Indeed, although 97% recognise climate change as a risk and publicly support the TCFD, only 50% indicate that the responsibility of climate risk management ultimately lies with their board of directors.

“Perhaps asset managers are actually doing more than they disclose, but there is also a possibility that for some of them their stated RI credentials are just marketing,” said Lee