As we look past Earth Day and towards the next United Nations Climate Change conference on 1 November (COP 26), it’s an opportunity for us to reflect on how the growth of socially conscious investing has sparked greater interest in stakeholder capitalism across the Asia-Pacific region.
Covid-19 has been defined as the 21st century’s first “sustainability” crisis that renewed the industry’s focus on climate change, and towards a more sustainable approach to investment. The buy-side industry has certainly helped drive a sense of urgency on the matter, especially since many of these firms are stewards of long-term capital across multiple generations. There however remain obstacles to layering this new form of thinking into current investment strategies. It’s therefore worth exploring how asset managers and owners in the region plan to overcome these challenges, and help put Asia at the forefront of ESG investing.
Let’s put one myth aside as a start. The thinking that there is a mild indifference to ESG considerations in Asia is false. At the recent Bloomberg-IMAS conference panel in Singapore, it is clear that there is strong buy-in across the region’s corporates and investors, who are working hard to respond to this global trend. Many innovative ESG products are already springing up across the region, and more recently in the wake of the pandemic, investors are taking a keener interest in factors like human capital, where issues like occupational health and safety, workplace safety, responsible purchasing practices and supply chain management have come to the fore. Meanwhile, seven Asian markets are currently in the process of introducing mandatory reporting standards or stewardship codes, with Japan and Thailand leading on this front.
The next decade of impact
The ESG market is expected to reach $45trn in AUM in 2020 and over the past year, assets in ESG ETFs have more than doubled to $80bn. But are we seeing sufficient traction for the next decade of investing in Asia? The ESG panel at the Bloomberg-IMAS conference discussed three main areas the region’s buy-side leaders are currently tackling in its rapid journey towards sustainable investing.
The first is the movement towards standardisation. Much like the rest of the world, Asia is faced with the challenges of a lack of consistent and comparable disclosure standard on ‘decision-useful’ disclosures; poor ESG disclosure levels in some parts of the region; and a lack of comprehensive and detailed coverage in parts of emerging Asia by ESG providers. This leaves the investment community open to potential ‘greenwashing’ as the quality of ESG measurement methodologies is obscured by a proliferation of different standards that all claim to accurately measure green and sustainable credentials. Regulators around the world are working rapidly to adopt global frameworks that asset managers can follow. The work of the Task Force on Climate-related Financial Disclosures (TCFD), for example, will help to bridge the gap between investor expectations and investment fund promises, providing clear standards around definitions, metrics and disclosure.
The second is understanding how to measure and model certain ESG risks. Indicators from the ‘environmental’ segment of ESG analysis show the extent of the challenge. For example, measuring a portfolio’s carbon footprint is theoretically quantifiable but quite difficult. Many different credible yet competing methodologies and models could feasibly be used to achieve this, sparking debate. Yet, one could go further and look at the impact on biodiversity or waste management issues, which would be much more difficult to evaluate quantitatively and rely solely on qualitative analysis.
And thirdly, it is clear that technology will have an important role to play in ability to invest in a sustainable way. Technology is enabling us to process big data with ease, allowing previous incompatible and incomparable data sets to be synthesised and analysed within frameworks tailored to a specific manager’s interests and requirements. Content and research analysis can even then be integrated into existing risk management practices, research management workflows and sophisticated modelling systems. Natural language processing is one exciting area that asset owners and managers are experimenting with to help support their ESG quantitative analysis. Using technology and AI, reports and analysis can be processed with certain words or sentences triggering alerts or feeding into processes around ESG factors, affecting a firm’s ESG rating.
Alpha with impact
As buy-side leaders address these challenges, what best encapsulates what they are trying to achieve? There are many facets to investing, but we see their collective mission this next decade and beyond to be the generation of ‘Alpha with Impact’. This means that aside from generating an investment return, it will also need to come with a positive long-term impact for a firm’s internal and external stakeholders.
This theme is especially applicable to sustainable investing, where the role of alpha generation extends beyond the bottom line. Investors are looking to asset managers and owners to generate alpha that can provide additional benefits to our society and planet at large. As we are already aware, ESG investing has evolved to become more than just a ‘tick the box’ exercise to becoming a method of protecting asset values.
When looking at it through a technology lens, it means enhancing your operational alpha to better serve your clients by creating data and workflow efficiencies for your business. Technology is key to unlocking the potential of financial data as discussed earlier, and as volumes of data outgrow our ability to make sense of it, technology will be the long-term enabler for successful investment management firms.
And as we look at how financial markets are becoming more connected globally, the ability to seek investments abroad has never been easier and more efficient with the right tools. In this ultra-low interest rate environment, yield is becoming harder to come by and diversification to different asset classes has become an important consideration for many global asset managers. As they seek out these new areas for growth, many of them will look to make an impact on the markets and societies they invest in.
As the world’s nations come together at the COP26 conference later this year, we can be assured that the investment management industry is already charting a course towards creating a more sustainable future. There are still many challenges to solve, but the rapid vaccination roll-out has shown us that perseverance and determination prevails when we set ourselves urgent goals. And creating Alpha with Impact has become that much more urgent for this industry.