ESG now a central consideration for asset owners

  • Economy
  • Monday, 30 Dec 2019

Franklin Templeton Emerging Markets Equity Chief Investment Officer Manraj Sekhon: “Businesses with a market leading approach to ESG are often characterised by superior management teams, greater long-term earnings sustainability and higher valuations.”

PETALING JAYA: Investor predisposition towards environmental, social and governance (ESG) investing in Asia-Pacific is rising rapidly, but investment adoption and application methods differ across the region. Globally, ESG is now a central consideration for asset owners, with a large majority building their capabilities in this area.

In a global study on ESG adoption by NMG Consulting, global investment house Franklin Templeton discovered that two-thirds (67%) of APAC respondents now consider ESG an important component within the investment process. The study involved 237 key decision makers.

Across Asia-Pacific, 71% of asset owners are investing to increase their ESG knowledge and expand their investment capabilities in this area. As ESG considerations gain acceptance, there is a high degree of consensus on the risk benefits, but differences of opinion on the impact on returns.

“ESG adopters in Australia and New Zealand in particular, no longer accept that ESG investing must mean accepting lower rates of return.

An impressive 94% of New Zealand respondents believe that ESG investments will in fact enhance returns, ” said Templeton.

While New Zealand leads in this belief, other Asian countries are not far behind with 80% holding this view across the rest of the region.

Overall, European asset owners focus on a broader set of ESG issues, reflecting the region’s longer track record on responsible investing, while Asia-Pacific and North American ESG adopters tend to have a narrower focus.

However in Asia-Pacific, of the two prioritized criteria ‘Environment’ and ‘Governance’ shifts in priority over time has seen ‘E’ becoming more important. 70% of respondents consider environmental factors as their first and second priority among the three factors.

Templeton Head of institutional (ex US) managing director Stephen Grundlingh said: “ESG considerations are becoming increasingly prominent across Asia Pacific, and large asset owners and asset managers are collaborating to capture the benefits of ESG.

The world today is facing a growing number of complex and interconnected challenges; from slowing global growth and persistent economic inequality, to climate change and geopolitical tensions.

Many of these risks are ultimately ESG related and are increasing in likelihood and impact.”

While Environment is rising in Asia Pacific, overall corporate governance (71%) ranks number one among Asia Pacific asset owners in terms of ESG priorities.

This is followed closely by the specific environmental impact of climate change (67%).

Sustainability (56%) and corporate corruption (54%) are also seen as significant concerns.

“The emphasis on corporate governance could be attributed to the fact that Asia-Pacific investors (with the exception of Australia and New Zealand) often have large exposures to emerging Asian markets where disclosure and corporate governance standards are less developed than in Europe and North America.

For Asia Pacific asset owners, the need to strengthen corporate governance is a long-standing preoccupation that predates responsible investment frameworks.

Franklin Templeton Emerging Markets Equity chief investment officer Manraj Sekhon concludes:

“ESG factors can have a material impact on a company’s current and future corporate value; consideration of these is integral to the rigorous fundamental bottom-up research our team conducts.

“We take a holistic approach in assessing ESG, considering both developed and emerging markets perspectives

“Businesses with a market leading approach to ESG are often characterised by superior management teams, greater long-term earnings sustainability and higher valuations.”

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