Interview with Leonie Kelly, Director, Head of Sustainable Investment Consulting, Ogier Global was recently interviewed by Jo Murphy, Managing Director, Industry Relations, Asia Pacific, CAIA Association.
How is the current landscape here in the Asia Pacific (APAC) regarding both ESG and Responsible Investing (RI)?
Asset managers are increasingly recognizing the potential impacts of ESG factors on asset valuation and are setting out to integrate such factors into their portfolios.
The 26th Conference of the Parties (COP) held in November has focused attention on sustainability risks, especially climate change. There is a growing sense of emergency on the back of COP26 and the UN's Intergovernmental Panel on Climate Change (IPCC) 2021 report findings. The IPCC report comes as a "code red for humanity" and categorically states that human influence has warmed the planet.
The IPCC report has acted as a sobering reminder to all leaseholders of our planet, including governments, consumers, and investors that collectively we need to take action and transition to a net-zero economy. Many countries and governments continue to commit to meeting Paris-aligned targets towards limiting global warming to well below 2°C and pursuing efforts to limit it to 1.5°C. Accelerating regulation, increasing client demand and changing consumer sentiment for responsibly managed assets and products is also pushing asset managers to evolve.
Asset managers are responding by reshaping existing products by adopting an ESG or "sustainable" lens and forming new sustainable product offerings. Capital flows into ESG funds continue to rise with total assets invested in Asia-domiciled funds at US$36.3 billion at the end of June, according to Morningstar. Hong Kong has been gaining pace in its sustainability evolution and has seen a steady growth in sustainable funds with US$416.5 million as of quarter two 2021.
However, despite increased capital flows several challenges remain for asset managers in making this transition a reality across the APAC region. These include a lack of and inconsistent ESG data across issues, ever evolving standards and frameworks for ESG measurement and reporting, navigating variability in regulatory requirements across Asia, and the need to prevent greenwashing.
How does APAC view ESG/RI, and is this different to elsewhere particularly when we compare to approaches taken in the Americas and EMEA?
We have seen the number of signatories from Asia to the Principles for Responsible Investment, a set of responsible investment-focused principles created by investors for investors, increase 23% in the last year to 421.
In terms of global sustainable investment assets – it reached US$35.5 trillion in 2020, a growth of 15% on 2018 figures, according to the Global Sustainable Investment Alliance (GSIA). The U.S. and Europe continued to account for over 80% of global sustainable investing assets during 2018 to 2020.
Assets in "sustainable" funds alone worldwide hit a record high of US$1.652 trillion as of the end of December 2020, according to Morningstar. New product launches reached an all-time high in the fourth quarter of 2020, with 196 new offerings, including 37 in countries outside of Europe and the United States. In the first quarter of 2021, inflows into European “sustainable” funds totalled €120 billion, 18% more than the first quarter of 2020, according to Morningstar. Of that, €36.5 billion went to passive index and ETFs. ESG integration continues to be the most common sustainable investment strategy globally, followed by negative screening, corporate engagement and shareholder action, norms-based screening and sustainability themed investment – this is demonstrated by GSIA 2020 report. What is evident in the international funds space is that managers are increasingly using a combination of strategies, rather than just one strategy.
Do you see APAC’s approach to these areas changing ahead, and where might headwinds present themselves?
The market for sustainable bonds will continue to grow, especially in Hong Kong and mainland China.
Over the next 12 months, investors in Asia will likely compete with a fast-moving investment landscape shaped by China’s increasing focus on sustainability. In the future companies with better ESG performance are likely to be the disruptors rather than the disrupted.
Alignment of taxonomies will also be critical for improving ESG data. If jurisdictions are asking for different environmental or social-related information from corporates, global investors will struggle to allocate their capital effectively. A consistent approach to taxonomies is very necessary to help produce the relevant information investors need to mobilize capital towards sustainable solutions.
Recognizing that legal differences between jurisdictions must be accounted for, effective taxonomies should maintain a principles-based approach so that there is some flexibility when tailoring taxonomies in different regions and economies – an example of efforts to align taxonomies is the Common Ground Taxonomy, launched by China and European Commission at COP26.
Building upon the last question, how are LPs currently monitoring GPs’ ESG and / or RI practices? And, what are the key areas we should consider / be looking at?
Managers have a big role to play in ensuring the resiliency and long-term value of investors' portfolios. PEI 2021 study reports 9 in 10 LPs state ESG forms a part of evaluating managers in due diligence processes. LPs are wanting to see a strong understanding of ESG issues by GPs and integration of these issues into the investment processes backed by documentation and reporting. LPs often look at the ESG-related beliefs, policy ambitions and practice and GPs willingness to develop ESG processes. LP's interest in specific ESG issues depends on how that institution defines its fiduciary duty and investment priorities, but governance is a universal priority and LP's are looking for evidence of good governance.
Any closing thoughts you’d like to leave with us for further consideration?
I think scrutiny over ESG disclosure will rise, it is no longer about skepticism on climate change in itself but rather the strategy behind net-zero pledges. The social taxonomy will broaden investors focus too beyond the E of ESG, although the exact classification framework is yet to be set. Data and standardisation and some level of consensus will be a theme in 2022 – reliable, consistent and timely data will be important to how the field analyses ESG risks and opportunities. We clearly can't predict the future but what we can say is that purpose, long-term values, and sustainability are not optional sides any longer, they are now in the front seat.
About the Author:
Jo Murphy has been in Asia for over 20 years, predominantly based in Hong Kong but with two valuable years spent in Singapore. She has held several senior Asia Pacific wide management positions, successfully leading sales, business development, marketing and client relationship management divisions for major institutions; and has both built and managed large and effective regionally located teams.
Jo was expatriated to Hong Kong, with Morgan Stanley, in early 1997 and has worked for several global institutions; covering intermediary, buy and sell side, entrepreneurial and now in a professional education business environment - throughout the Alternative Investment industry.
In 2000, Jo joined HSBC Securities Services (previously Bank of Bermuda) as Head of Sales, Asia Pacific (based in Hong Kong) and in 2005 moved on to Head of Sales Asia (ex-Japan) and Product Specialist for all alternative investment products at Deutsche Asset Management (in Singapore). In 2008 Jo joined Triple A Partners, a privately held group. In early 2012 Jo joined the Chartered Alternative Investment Analyst (CAIA) Association, the international leader in alternative investment education and provider of the CAIA designation, as Managing Director, Asia Pacific.
Jo enjoys the reputation of being hard-working, capable, committed and commercial; was voted “Asia’s most influential woman in the alternative sector” and also one of “The 25 most influential people in Asian hedge funds” by the industry’s leading AsianInvestor magazine. Jo also was a founding member of the Hong Kong AIMA Chapter, previously held an Executive Committee Member position and now sits on its Education Committee. Further, she also holds a number of corporate advisory positions, is a Fellow of SUSS (Singapore) as well as an advisory council member of UPACA Gurukul (India).