Gabriel Wilson-Otto, director of sustainable investment at Fidelity International, answers ESG Clarity questions on integration, engagement, flows and the future for ESG investing in Asia.
What are the main challenges for corporates in Asia in integrating ESG practices? And where do you think Asia corporates are already at an advantage?
Asia is an incredibly diverse region and home to companies that are global leaders in strategic integration of ESG considerations, as well as companies that are just starting their journey towards identifying and managing ESG risks and opportunities.
A key challenge corporates face stems from the combination of a common misunderstanding about ESG practices. Traditionally, many corporates in Asia have treated ‘doing well’ and ‘doing good’ as separate activities. This is reflected in a siloed mindset towards a company’s daily operations ‘doing well’ and CSR activities ‘doing good’.
Effective ESG integration needs to break down this binary logic and to adopt a strategic consideration of material ESG issues that could represent a risk or opportunity. This can help companies identify where there are areas of overlap between ‘doing well’ and ‘doing good’ as well as make more informed decisions about ESG issues impacting business resilience.
Two interesting sources of advantage for corporates in Asia for ESG integration are the ‘second mover’ advantage and concentrated ownership. Corporates and regulators in Asia can observe, tailor and adopt leading ESG practices from other parts of the world and leap-frog straight to implementation of best practice or new technology. The prevalence of concentrated corporate ownership can pose corporate governance challenges, but may contribute to a longer term mind-set for risk management and capital allocation that is more aligned with the time horizon over which ESG risks and opportunities typically occur.
How do you approach engagement with Asia corporates on ESG?
Fidelity’s approach to active ownership includes direct and collaborative company engagements, engagement with policy makers and our voting activities. Company engagements typically seek to either gain a deeper understanding of a company’s approach to ESG or to use our influence to improve the sustainability practices of the companies we own.
Global insights need to be tailored for the local context to help maximise chances of success. In practice, this means our ESG engagements with companies in Asia are often tailored to both the maturity of a company’s ESG journey, and country of domicile. This can be a critical step towards establishing a productive long-term partnership to help improve a company’s performance on material sustainability issues.
To provide a bit of context, in 2021, we held 20,000 company meetings globally where half of them were with c-suite or chair/lead director. The number of overall engagements in Asia has increased 10% in 2021 compared with the previous year.
What have inflows been like into Asia ESG strategies?
Globally, 2021 was a record year for ESG strategies, with an estimated $120bn of new sustainable investments, more than double the $51bn seen in 2020. This was supported by retail investors seeking to align their wallet and values, and fundamental investors chasing thematic exposure to outperforming ESG themes such as renewable energy.
In 2022 to date in Asia, inflows into ESG strategies continue to outpace non-ESG strategies, but have slowed significantly from the peak in 2021 due to a more challenging macro-economic backdrop and near-term thematic headwinds for traditional ESG themes.
What are the key ESG themes for investment over the coming three years at Fidelity?
We continually review how we prioritise and focus our active ownership efforts. As part of this process, we select key themes annually that help guide our engagements. 2021 was a year of continued momentum for sustainable investing, we have made meaningful progress on the three sustainable investing themes around climate and natural capital, employee welfare and digital ethics.
Outcomes from COP26 and our renewed emphasis on materiality shifted our engagement priorities as we entered 2022. Building on our themes from 2021, we have identified three key themes for our engagement – deforestation, just transition and double materiality.
The effects of climate change, and the policies aimed at slowing it, will have profound effects on the global economy for decades to come. As a result, capital allocation within portfolios and across asset classes must consider how best to account for a changing world, aligning with global commitments to reduce greenhouse gas (GHG) emissions and mitigate physical and transition risks.
We expect the green energy transition to continue to face short-term headwinds due to a deteriorating economic outlook, stubborn inflation and ongoing geopolitical tension. Over a longer-term horizon, we see the current crisis leading to a more rapid transition towards low carbon and renewable energy sources due to shifting economics and moves towards energy independence. This creates opportunities for investors to invest with impact alongside achieving financial return.
What would you like to see next in terms of ESG regulation in Asia?
Further steps towards regional and global harmonisation are at the top of my ‘wish list’ for ESG regulation in Asia, followed by increased availability of high quality and standardised ESG data. I am hopeful that the disclosure standards developed by the ISSB will be broadly adopted in Asia and contribute towards these outcomes.
On data availability, I have been following with interest recent developments from the Securities and Futures Commission (SFC) who are seeking to establish a climate data portal to facilitate access to carbon emissions data.
I would love to see this initiative expanded to include a broader core set of ESG metrics, harmonised with ESG data disclosure requirements from regional stock exchanges and made publicly available.
This is ambitious but could contribute materially to the development of the broader ESG eco-system in Asia.