ESG may have had a tough few months in the face of geopolitical and macroeconomic headwinds, although the topic remains very much at the forefront of investors’ minds and it has proved far more resilient as an asset class than it might initially have been expected to, investment specialists from the private wealth and fund management communities agreed at Fund Select Asia’s recent SpotlightOn: ESG event.
“I think climate investing was very popular, especially last year,” said Eugenia Koh, global head of sustainable finance for consumer, private and business banking at Standard Chartered. “That definitely took a bit of a hit, but even now clients are still willing to stay with the theme. I think a lot of them recognise it is a long-term, structural trend.”
Those sentiments were echoed by other panellists including Henry Loh, head of Asian credit fixed income at Asia abrdn, who pointed out that while emerging market credit funds on average had seen net outflows this year, emerging market sustainable credit funds had actually seen net inflows.
“Clearly it’s [sustainability] still at the forefront of investors’ minds and clearly people are still thinking about it,” he said. “While we’re seeing all these near-term problems and distractions…the structural themes that are driving sustainability in economies such as regulations have not changed.”
The panellists acknowledged that while there was some debate about whether ESG contributed to outperformance, even during a time when investors’ attention was diverted to other matters, it remained crucial to keep engaged on the topic from a risk management perspective.
“When you think about some of the ingredients of poor performance, typically it comes from a small number of investments going very badly wrong,” said Harry Thomas, co-portfolio manager of the environmental solutions equity strategy at TT International. “At the heart of many of those blow-ups that will ruin a year’s performance typically sits the environmental, social and governance problems.”
Several of the speakers noted that there were challenges specific to Asia, particularly around the quality of the data. Alexandra Stettler, vice president and sustainability product specialist for investment solutions and sustainability wealth solutions at Credit Suisse, noted that disclosure with regards to environmental standards was much better than it was for social factors. “But all in all, I do think it’s moving in the right direction already and…it’s encouraging companies to disclose more,” she said.
The participants also noted that several companies in the region were still at the beginning of their ESG journey and so for investors simply relying on exclusions is often counter-productive as data may not reflect their direction of travel.
“Some of these companies are putting measures in place that will transform them, that will change them in the long-term and as a result if we normally rely on a negative exclusion strategy, that might not be so productive or value-adding in the near term,” said Loh.
Meanwhile, greenwashing was brought up as being a particularly thorny issue, especially as there is no clear definition on what constitutes sustainable investment or not so these accusations are often subjective.
Koh pointed out that it was therefore important that fund managers were transparent about the criteria they use so if a client is focused on certain exclusions, they would be able to avoid a particular fund.
Thomas pointed out that tackling greenwashing would necessitate top-down action. “Top-down from the regulators, with things like SDFR [Sustainable Finance Disclosure Regulation] in Europe where you will have Principal Adverse Impact indicators, which we are going to be reporting next year, clearly showing where even within a sustainable strategy you might be having an adverse impact through your investments, which is definitely going to increase transparency,” he said.
Thomas also noted that there were a number of areas that were still underrepresented within investors’ portfolios such as hydrogen, which was primarily due to the fact that it is largely inaccessible as a pure-play investment. Stettler noted that biodiversity was also an area that was underrepresented currently, while Koh pointed out that there was more attention now on climate adaptation given that it is looking increasingly unlikely that global warming will remain below 1.5 degrees.
To access the full on-demand recordings and materials from SpotlightOn: ESG, please visit: https://fundselectorasia.com/spotlight-on/esg-2022/
