The vast majority of institutional investors in Asia Pacific have incorporated environmental, social and governance (ESG) components in their investment strategies, according to findings from a survey by State Street Global Advisors (SSGA). However, their share of assets with ESG exposure remains low.
SSGA, the investment management arm of New York-listed State Street Corporation, polled 475 institutional investors globally, including public and private pension funds, endowments, foundations, family offices and sovereign wealth funds, with approximately US$2.47 trillion in total AUM as of December 31, 2016. Of these, 39% or 185 were from the Asia Pacific region, including Australia, China, Hong Kong, Japan, Korea, and Singapore.
The survey was conducted between December 2016 and January 2017.
Some 85% of investors in the Asia Pacific region said they have included ESG elements in their investment strategies, SSGA says. In addition, 70% said the integration of an ESG strategy has significantly improved returns, and 74% said pursuing an ESG strategy has helped with managing volatility.
“In the last four or five years, we’ve seen a marked increase in the level of awareness and interest in ESG at the institutional level,” Rakhi Kumar, head of ESG Investments and Asset Stewardship at SSGA, says in a statement on Thursday. “There’s a broader appreciation of the notion that good governance translates into better management of areas such as a company’s carbon footprint, as well as how management engages with workforce. The companies that operate this way are better quality investments that yield better performance long term.”
The survey shows that Asia Pacific investors are ahead of their global peers in terms of incorporating active ownership as part of a comprehensive ESG strategy. About 80% of respondents from the region have some level of ESG engagement with the companies in which they invest, compared to 70% in the US and 58% in Europe, the Middle East and Africa (EMEA).
In spite of increased adoption of ESG strategies by Asia Pacific institutional investors, the survey findings show that the share of their portfolios with ESG exposure remains low. Only 19% of respondents in Asia Pacific have more than half their assets exposed to ESG factors, and 43% have less than one-quarter exposure.
Key challenges that inhibit greater ESG adoption in Asia Pacific include cost, limited demand from stakeholders, and lack of internal knowledge and capability. Globally, over 50% of respondents said it was difficult to benchmark performance against peers, and that accurate assessment of external ESG asset managers was a key issue.
“As more investors appreciate that their financial return objectives can sit comfortably alongside positive change through promoting ESG factors in their investments, we expect the overall percentage of ESG exposed assets to increase,” Kevin Anderson, head of investments, Asia Pacific at SSGA, tells Asia Asset Management.
He adds that some difficulties encountered by asset owners in the course of adopting ESG, such as benchmarking performance, can be addressed through education and communication with their external managers.