Checks and balances

Category: Asia, Hong Kong, Singapore, Global
By Nazneen Halim

Creating sustainable investments for the future through ESG compliance

On November 17, Asia Asset Management (AAM) held its inaugural roundtable on Environmental, Social and Governance (ESG) investing titled The World of ESG: Issues and Opportunities. Although ESG investing is not a new concept, and has been slowly trickling into asset management space since the 1970s mainly through faith-based organisations, it has yet to be truly appreciated in Asia. However, in the recent decade, a shift towards responsible investing and a clearer picture on the effects of climate change; heightened emphasis on corporate governance following the global credit crisis; and growing consumer interest in socially-conscious businesses has paved the way for ESG investing into the mainstream. In Europe and the US, asset management companies such as Schroders have had a long track record of maintaining fully-integrated ESG platforms, with billions of dollars under management. These firms have expressed a strong and continuous commitment towards ESG investing and believe that these investments have an important role to play for alpha generation and risk management.

Contrary to popular belief, ESG investing is very much performance-driven, with long-term yields that often outperform market benchmarks. It is, however, very much for the discerning investor who is interested in making a difference in their environment and community through their investment decisions.

The ESG roundtable began with an eye-opening presentation by Dr. Rusdian Lubis, senior adviser at PT Greencap NAA and PT Bosowa Corporindo and former chair of the compliance review panel for the Asian Development Bank, executive vice president at PT Freeport Indonesia and senior environmental specialist at the World Bank, who shared his experience and struggles in working with various organisations around the world to preserve cultural heritage, environmental biodiversity, workers’ rights, indigenous land and religious rights through upholding policies and keeping governments, corporates and banks in check and aware of the implications of their intervention in a country or area.

“Biodiversity and environmental issues are becoming more serious in regions such as Southeast Asia, because after Africa and Brazil, we are considered a mega biodiversity,” said Dr. Rusdian. According to him, one of the most controversial issues is that of palm oil due to the amount of land and resources that are required for every plantation – which deeply scars the land and affects important fauna. He shared his experience with the World Bank, where a project in Tanzania was completely halted as it was posing a threat to the area’s rare fauna.

Asian outlook

Setting the tone for the event, Mr. Lubis’ presentation was followed by the first panel session chaired by Todd Ruppert, CEO at Ruppert International, featuring Laura Rieber, senior investment director at Cambridge Associates; Arisa Kishigami, head of ESG, Asia Pacific at FTSE Russell; and Roongnapa Wisaruetapa, director, corporate governance department at the Government Pension Fund, Thailand. The panel, which was titled Incorporating ESG into Institutional Portfolios, discussed the United Nations’ Principles for Responsible Investing (UNPRI) and how it defines ESG businesses globally, as well as the progress and prospects within Asia in the adoption of ESG-compliant investments.

According to Ms. Arisa, the terminology used to describe ESG is still evolving, and for her team at FTSE Russell, “sustainable investing” is a term that better describes their agenda. “In FTSE Russell we broadly separate how we evaluate companies into two main approaches: The first is how companies are operating, and how they recognise the potential environmental, social and risk exposures – and how they are addressing them; and the other side is the business opportunity, and what sort of solutions companies are producing through products, goods and services that we can adapt to a new environment – for example, a low-carbon economy.”

Ms. Roongnapa from the Government Pension Fund of Thailand revealed that the defined- contribution pension fund with over US$20 billion in assets under management is seriously considering the launch of an ESG pilot project – making it the first pension fund in the region to do so. She refers to the fund as a more “local” rather than “global” investor, and has over 60% of its investments in non-risky assets. “We consider ESG in two aspects, with the first being risk – whether there are any risky aspects in the companies that we invest, and the second is competitive advantage,” she revealed.

Ms. Roongnapa went on to say: “The progress of Thailand into ESG investing can also be seen in terms of regulation. The regulators are also planning to launch the strategic code for institutional investors, and I think it will strengthen the power of institutional investors in elevating the level of ESG integration into the companies that we invest. Collective action among investors is increasing in Thailand. Earlier this year, institutional investors in Thailand came together to vote against one of the largest listed companies, because the company’s executive was caught for insider trading. That is a remarkable move towards sustainable investment in Thailand.”

Commenting on active vs. passive management, Ms. Rieber said: “As the active manager universe expands, it will be easier to incorporate ESG more actively. I think now it’s just a question of institutions wanting to make sure they don’t limit their selection of the best active managers, so some of them might choose to incorporate this into the passive part of their portfolio.”

Ms. Arisa added to this point, saying: “I think there’s a number of ways that investors that are concerned about ESG utilise indices. For example, even by using conventional indices that are not necessarily clearly ESG, you can still engage with the ESG agenda by trying to manage the long-term risk of that index management by engaging with those companies that are identified to have higher potential risk with poor practices or poor disclosure – and that’s the trend that we are seeing globally. In the case of ESG indices, asset managers don’t necessarily always need to use it for attractive funds, but can instead use it as a pool of stocks to select from - from an active investments point of view. We found this trend especially prevalent in emerging markets where the definition of ESG is still variable, and so it’s a good starting point to say: “We’ve found companies within a certain threshold, and let’s find those that are the winners even within that particular pool of stocks”.”

Japan, Malaysia, South Korea, Hong Kong and Singapore by the end of this year, will have their stewardship codes in place. Commenting on Thailand’s progress, Ms. Roongnapa said: “The Securities Commission of Thailand is now launching a public hearing of the Investor Governance Code, and this will increase the role of institutional investors in responsible investments, as one of the codes is about integration of ESG factors into the investment decisions.”

All three panellists agreed that “governance”, out of the three ESG factors, is perhaps still the most important to Asian investors at the moment; however, it is also dependent on what the key issues within a certain geography are at the time.

Transparency and big data

Moving on to the second panel discussion on Sustainable Investing: The Big Picture, panellists Naren Gorthy, senior analyst at First State Stewart Asia; Gaving Marriott, client portfolio manager, global and international equities at Schroders; and Youngjae Ryu, CEO at Sustinvest Research & Consulting, took a more introspective look with the session’s moderator, Tan Lee Hock, founder and publisher of Asia Asset Management, discussing the key features that make a company sustainable, the importance of big-data analytics in gathering and processing investment information, and also how to overcome a lack of transparency in ESG reporting.

Commenting on how to engage with companies on issues of transparency, Mr. Marriott said: “The disclosure within financial reporting accounts is only one element of the way you can appraise companies. Meeting with management, talking to them about how they’re looking to develop their business and sustainable practices – is much more important than what we may recognise at face value, and disclosure is very important. If you take the US for instance, 75% of US companies will by now, have corporate sustainability disclosure that they will be using to promote their sustainability practices to investors.”

In contrast, South Korea paints a very different picture in terms of transparency. Mr. Ryu commented: “Even out of the 5% of companies in Korea that we audit, we find it hard to trust their answers, and are still suspicious of CSR (corporate social responsibility) and ESG-washing. For the last seven-to-eight years, we’ve found many sources on ESG, but the information was all scattered. At Sustinvest, we analyse all this data from regulators, NGOs, media and so on, and we develop the cumulative data and send them back to the companies. Then we go through a verification process, and if the company is not satisfied with our data, we require reasonable answers and proof from the companies (to dispute this).” The company is also currently working on using big-data analytics and machine-learning technology, couples with their own in-house developed algorithms, to produce more accurate and predictable data on ESG in Korea.

Following lunch, and the award presentation for the winner of the AAM-CAMRI Asset Management prize, the third panel came together to discuss Building an ESG Portfolio: Perspectives from Advisers and Managers. The panel, moderated by Edouard Merette, chairman of the Asian board of Unigestion, comprised of Alex Ng, chief investment officer, Asia Pacific, for BNP Paribas Investment Partners; Iain Richards, head of responsible investment for EMEA at Columbia Threadneedle Investments; Tuck Meng Yee, partner at JRT Partners; and Shan Kamahl Mohammad, CEO/ CIO at VCAP Asset Managers.

Mr. Ng commented on the relatability, or rather a lack thereof, of current ESG research: “It is important to deliver ESG research that people can relate to, and see how it impacts investors and fund managers in their everyday lives.”

From a fund manager’s perspective, Mr. Shan revealed that engagement with asset owners is crucial in the information-gathering process: “We use service providers like FTSE and MSCI to give us a broad understanding of what ESG factors need to be considered, and the second stage is actually engaging these companies; because a lot more information can be obtained in this manner.”

Citing the plantation sector as an example, Mr. Shan adds: “We believe in investing in the best-in-class, and because of this, we don’t exclude the plantation sector. There are actually quite a few plantation companies that do a lot of good, and therefore there has to be a balancing act, and the values system within the fund manager itself must resonate with asset owners. Which is why the early conversation you have with asset owners is key.”

Corporate governance

The fourth and final panel discussion was titled Corporate Governance in Asia, and was moderated by Dr. Emir Hrnjic, CEO of the Centre for Islamic Banking, Finance and Management in Brunei, and visiting senior research fellow at CAMRI. He was joined by Professor Lawrence Loh, director of the Centre for Governance, Institutions and Organisations at NUS Business School; Han Ming Ho, partner at Sidley Austin LLP; and Dr. Bandid Nijathaworn, president and CEO of the Thai Institute of Directors and visiting professor at Hitotsubashi University in Japan.

Han Ming Ho began his discussion by stating: “Corporate governance is an extremely topical issue going forward in this part of the world, vs. North America and Europe. The other angle which corporate governance does come up is not really at the company domain level – it’s relevant; but it’s more the investors whom I represent sometimes. Representing institutional investors, particularly in North America, they do have standards that may not be “typical” out here in Asia. So, corporate governance is definitely an issue that we see on the uptrend.”

Professor Lawrence cited examples from the region, saying: “Perhaps the greatest irony and paradox in the corporate sector now is that many companies (even in Singapore) are getting out of the stock market, and there is a lot of de-listing amongst the big companies such as Osim, Eu Yan Sang, SMRT and the like. If you actually probe into their motives, it is actually that the cost of complying with corporate governance is getting too high.

He adds that companies are becoming more inclined to “act in the interest of the business” rather than spending their resources having to answer to stockholders and comply to standards and taking a short or long-term view. “Now people are going the “comply or survive” route: in the last four years, the value of de-listings on the SGX (Singapore Exchange) has surpassed the value of IPOs. It is ironic that the very thing that is meant to help them (corporate governance) is not being appreciated.”

Commenting on catalysts for change in corporate governance in the next three-to-five years, Dr. Bandid said: “Building on what’s happening now in the region, in my view, I think regulators will become more of a driving force behind this. In Thailand for instance, the regulators are driving the corporate governance code. Institutional investors will also have greater expectations on corporate governance; and although foreign investors tended to play the part of active owners, domestic investors now are becoming more vocal. I think these will be the catalysts in promoting corporate governance in the region.”

Throughout the day, presentations on topical issues surrounding ESG investing were also weaved in between the panel sessions; providing the audience with a refreshing perspective on a range of topics from Why ESG Matters to Impact Investing in Asia. Presenters included Iain Richards, head of responsible investment, EMEA, at Columbia Threadneedle Investments, who shared with the audience that environmental factors are just as important as governance in today’s world.

Helena Viñes Fiestas, head of sustainability research at BNP Paribas Investment gave a very lively presentation on The ESG Way: Opening Opportunities and Tackling Concerns. During her talk, she mentioned that “greening” the financial system will cost between US$5 to $7 trillion in the next year or so, and that there are immense opportunities in green bonds and green investment funds. Countries within the EU are also working towards a green finance strategy. Commenting on Donald Trump’s anti-climate change stance and the US’s desire to remove itself from the Paris Accord, Ms. Fiestas believes it will be: “Very difficult for the US to get out of the Paris Accord, and this will not come into force for a while.”

Other presenters also included: Naren Gorthy, senior analyst at First State Stewart Asia; Dr. Heiko Jacobs, assistant professor at the University of Mannheim – winner of the AAM-CAMRI Asset Management Award, as well as Christina Maynes, Singapore chief consultant to IFMR Capital and Professor Durreen Shahnaz, founder of IIX and Shujog.

The event was a great success in creating much-needed awareness in ESG investing, and its importance in ensuring long-term, sustainable business and social goals are met.