WHEN it comes to factoring environmental, social and governance (ESG) criteria into investment decisions, momentum has been rather slow among the Asian investment community.
While markets in the US and Europe have adopted ESG investing at a rapid pace, investors in Asia are still catching up.
According to the Principles for Responsible Investment (PRI), which the UN launched in 2006 as a framework for asset owners to demonstrate their commitment to responsible investing, only 5.9% of total signatories are from Asia. This number significantly trails Europe’s 54.2% and North America’s 24.2%.
Barriers to responsible investing in Asia
One of the greatest barriers to the adoption of ESG investment strategies in Asia is the deeply held view by many investors that responsible investing involves a trade-off in profits. The assumption is that responsible investing is an optional addition to investment costs that could potentially jeopardize financial returns.
However, this old-fashioned view has been increasingly challenged by a large body of financial literature that corroborates the link between ESG factors and enhanced investment performance. Numerous academic and industry studies have shown that an ESG investing approach can not only keep pace with markets, but in some instances even outperform them.
There is hence a lack of education or awareness among Asian investors around the many different approaches to responsible investing and their capacity for positive financial outcomes.
This indicates the need for a well-developed ESG research process focused on the economic relevance of ESG to investment choices, as well as the need for more effective engagement with companies and investors.
Another strong barrier to the uptake of ESG is the typically shorter-term view that Asian investors take on their investments. Since Asia is primarily composed of emerging markets, companies and fund managers often face pressure to prioritise faster economic growth over more sustainable yet longer-term returns.
The result has been that investors with a short-term focus end up setting inefficient prices in public markets. By taking a short-term view of an investment’s value, assets end up being under-priced by investors which collectively leads to herd behaviour, excess volatility and economic bubbles. This, in turn, prevents corporate boards and management to make optimal decisions for creating long-term value.
ESG starts with ‘E’ for environment
The barriers to adoption of ESG in Asia can be overcome if we equally consider the risks and vulnerabilities facing investors if they don’t start making the change towards responsible investing.
In this regard, there is a strong consensus among investors that climate-related risks represent the most urgent threat to their investment portfolios.
Indeed, the value of global financial assets at risk from climate change has been estimated at US$2.5 trillion by the London School of Economics and US$4.2 trillion by the Economist.
Thus, climate-related risks can no longer be avoided entirely by financial institutions as they impact all sectors and require tangible actions to address these issues. Investors should start thinking of themselves as stewards of the future and seek to address environmental risks proactively to avoid falling behind the curve.
With this in mind, Kumpulan Wang Persaraan Diperbadankan (KWAP), Malaysia’s largest pension fund for the public sector, has taken a number of initiatives to start addressing climate-related risks.
In addition to becoming the first pension fund in Malaysia to have endorsed the PRI, KWAP has also commenced a number of environment-focused CSR initiatives like the Eco Green Education Programme and Litre of Light Programme.
This year, KWAP has big plans to advocate further progress in the ESG ecosystem by hosting the KWAP Inspire: Environmental Conference in July 2018. Themed “Igniting Action for a Better Tomorrow”, the conference will bring together environmental and investment experts to discuss issues critical to sustainable investment.
By engaging with local peers and the global financial fraternity, KWAP aims to encourage investors to start taking action for the environment through responsible investing. The conference are receiving support from key industry players such as Amundi Asset Management, BNP Paribas Asset Management and Glenmont Partners.