A four-pillar approach to ESG
BNP Paribas Asset Management (BNP Paribas AM) has spent the past two years implementing a firm-wide approach to sustainable investment and ESG integration, a feat which is recognised by Asia Asset Management in the 2021 Best of the Best Awards with multiple awards, including regional awards for Best Impact Investing Manager and Best Application of ESG, and country awards for Best ESG Manager in Hong Kong, Korea and Malaysia. The firm was also awarded Best Asia Pacific Equity ex-Japan (3 years); Most Innovative Product (Hong Kong); Best Product Launch (Indonesia); Best Institutional House (Korea); CEO of the Year (Malaysia) – Angelina Chin-Sharpe; and Best Smart Beta Strategy.
BNP Paribas AM has adopted a four-pillar approach to applying sustainable investment practices consistently across all of its sectors and geographies. Paul Milon, head of stewardship Asia Pacific, explains that the first pillar involved the creation of a set of well-defined ESG integration guidelines that applied to all investment strategies. These guidelines include a number of key performance indicators, such as ensuring portfolios have a lower carbon footprint than the benchmark. It also set up an ESG Validation Committee to validate the ESG integration processes being used by individual investment teams to ensure the firm-wide requirements were being met.
The second pillar involves stewardship and active ownership, under which BNP Paribas AM engages with the companies in which it invests to encourage them to improve their ESG practices.
The third pillar relates to responsible business conduct, with the firm actively excluding companies that do not meet global ESG standards or its own minimum requirements from its portfolios.
The final pillar focuses on three priority themes, dubbed the ‘three Es’, that BNP Paribas AM has identified, namely energy transition to a low carbon economy, environmental sustainability and equality and inclusive growth.
Data challenges
Milon says one of the big challenges asset managers face when pursuing ESG strategies is the availability of standardised, quality data. To overcome this issue, BNP Paribas has created its own proprietary ESG scoring framework, using metrics that are both material to a company’s performance and widely available.
It looks at an average of just 37 metrics per sector, rather than the typical 100, so that each metric has a higher impact on the final score.
The final ESG score also includes a qualitative overlay, produced in conjunction with its investment teams on the ground, to reflect factors not captured by the metrics.
The firm has created a total of 80 tables comparing companies across 20 sector groups and four geographies, to see how individual companies perform against their competitors.
Milon has seen a significant increase in interest in ESG investment among asset owners in Asia in recent years: “In the last two to three years there has been a massive pick-up in terms of interest and capacity building and more implementation by asset owners. We are seeing very strong momentum,” he says.
China growth
Meanwhile, BNP Paribas AM has identified China as being a bright spot in 2021 after the resilience it showed in 2020.
“For 2021, we expect a more balanced economy with more robust consumption and services sectors, as well as a fast-growing innovative segments in technology and life sciences,” David Choa, head of Greater China equities, BNP Paribas Asset Management, says.
He adds that with a controlled monetary and fiscal policy during 2020, China has stored up enough ammunition to cover any Covid-19 resurgence or increased geopolitical tensions. As a result, BNP Paribas AM is predicting full-year GDP growth for 2021 of 7.2%, allowing for deleveraging and a lopsided recovery.
Choa says China’s ‘Dual Circulation’ policy, which focuses on boosting domestic growth and high-tech infrastructure investment while still engaging with global markets, puts an emphasis on the green economy, climate control and manufacturing revitalisation.
“This augurs well for sectors in new infrastructure spending, technological innovation and upgrading, artificial intelligence, 5G networks, big data centres, healthcare, as well as environmental protection, water conservation projects and renewable energy,” he says. He adds that domestic demand growth, import substitution and technological self-sufficiency all look set to be key macroeconomic drivers for investment opportunities in China in the coming years.
BNP Paribas takes a bottom-up stock selection approach, identifying the highest quality growth companies in China that deliver sustainable earnings growth over the long term and have sound or improving ESG profiles. It also looks for companies that have lower correlation with the economic situation and market rotation. In addition, it invests along four trends, namely companies involved in innovation that will not be impacted by external factors, big names that will stand the test of time even during market corrections, turnaround stories for companies that have been left behind, and cyclical names whose earnings have been lagging behind.