Asian institutional investors seem to regard ESG more as charity than risk management. The CIO of an Asian university endowment fund told IPA: “In Asia, we’re not interested in ESG. We’re only interested in making money.”
However, some of the larger institutions in the region, including the sovereign funds, are beginning to consider integrating issues of sustainability into their investment processes. One global investor, recently installed in Singapore, that others generally take a cue from is the Norwegian Government Pension Fund. Astute, progressive in thinking yet conservative in execution, the fund is the torchbearer among institutions investing with long-term financial impact of ESG issues in their investment process.
In a recent interview with IPA, the fund’s chief strategic officer Dag Dyrdal said the Norwegian Ministry of Finance, which owns the fund’s assets, is studying the possibility of investing in sectors such as clean technology, sustainable growth sectors in emerging markets and other environment-related areas in the future.
According to Andre Abadie, director of Sustainable Finance and a co-author of the ‘Equator Principles’, “Institutional investors are beginning to recognise megatrends. The scarcity of water, for example, is one immediate impact on the businesses that institutions invest in. If the cost of water escalates or if there is stricter legislation on treating waste water, the cost of doing business will increase,” says Abadie, whose firm helps financial services companies establish and implement ESG-related strategies. Earlier this year, IPA reported on the challenges China faces in the area of water scarcity. Other developments investors consider as megatrends include the scarcity of natural resources, the depletion of fossil fuels and climate change.
An investment framework using ESG as a backbone is about redefining risk appetite, says Abadie. “We examine risk issues that can impact returns, affect the value of their assets and the implications for investment strategy. It’s no longer about reputational risk management.”
One Asian sovereign fund, which cannot be named, is considering how to factor ESG into its decision-making processes and how it all fits into national economic objectives, Abadie says. “The answers to those questions will then decide how the fund will allocate capital, its risk appetite, who is responsible for the initiative, whom to hire and so on.”
There are signs that ESG is trickling into the mainstream. Large multinational companies have been acquiring providers of ESG information and services lately. Abadie’s Sustainable Finance was bought by PricewaterhouseCoopers in 2008 and ASSET4, a database and analysis service, was acquired by Thomson Reuters in late 2009.
There are now numerous tools for pension fund trustees and other institutional investors to understand and implement ESG-sensitive investing strategies. They range from guides to assessing climate risk to tailor-made investigations into investees’ or potential investees’ ESG behaviour.
For example, Australia’s A$6.1 billion VicSuper has since 2007 commissioned Trucost, a research firm measuring environmental impact, to estimate the risk exposure of S&P ASX 200 companies to greenhouse gas emissions. VicSuper’s latest ‘Carbon Count’ report states: “Climate risks and opportunities that have financial implications for companies could affect the performance of investment portfolios. Superannuation fund assets invested in the Australian equities market are exposed to the costs of climate change.” The report found that the carbon cost of the ASX200 companies would be 0.37% of their total turnover, or A$2.7 billion, in 2010 based on a market price of A$10 per tonne of carbon emitted.
The ESG industry too, is becoming more sophisticated in its understanding of how ESG affects investments. At the cutting edge is a consideration of biodiversity impacts, which studies complex systems as opposed to the relatively elementary approach of measuring greenhouse gas emissions or negative screening approaches, says Abadie.
Investors are also beginning to evaluate ESG impact on fixed-income and credit assets. In March, Colonial First State Global Asset Management (CFSGAM) appointed ASSET4 as ESG research provider because the latter’s data covers unlisted companies, sovereign entities and supranationals in addition to listed firms. “ASSET4 will gradually be rolled out across the listed equity and credit and fixed interest teams at CFSGAM. Every analyst will eventually have access to the ASSET4 database. This is a critical next step in the mainstreaming of ESG across our business,” says Amanda McCluskey, head of sustainability and responsible investment at CFSGAM.
But in Asia, the ESG industry is largely stumbling in a pre-dawn. Among 208 asset owners who have signed on to the UN Principles for Responsible Investing, only six are Asian, half of which are Japanese. Most are relatively small funds such as Kehati, the Indonesian Biodiversity Foundation, the Kikkoman Corporation Pension Scheme and the Government Pension Fund of Thailand. Korea’s National Pension Service is the largest and most recognisable institution among the six.
The Emerging Market Disclosure Project’s Korea Team laments the slow progress even in Korea, one of the more advanced markets in the region. The team reported in April 2010 that “Overall, the number of companies publishing CSR reports has increased rapidly since 2006. Most of them use Global Reporting Initiative (GRI) guidance, although experts and investors are still concerned at the quality and lack of materiality in reporting. Only a tiny fraction of these glossy brochures deliver greater transparency on ESG risk to investors. Many companies, even the larger listed ones, still do not publish CSR reports and it is hard to find any reporting within the financial and service sectors. Most Korean companies have, thus far, regarded environmental management as a key ESG strategy. They show relatively poor understanding and reporting on social issues, especially human rights and stakeholder issues, apart from corporate philanthropy for the local community.”
Likewise, most Asian institutions’ annual reports contain a section on how much money was given to charity and staff’s efforts at volunteering, but a report on how the institution is tracking and managing long-term financial risks from ESG developments is almost unheard of.