Making ESG more mainstream

Henry: Investors now have access to a range of ESG data providers, external rating agencies and academic research papers that evidence the impact of ESG factors on financial markets and portfolio returns.

From the perspective of an investor undertaking ESG analysis of corporates within Asia, reporting (and thus the resulting data) is in its early stages and quality varies across companies, sectors and countries. We find that engagement is a key to understanding ESG data in context and important for getting clarity around the measures that companies are putting in place to address their key ESG risks, and this gives us greater confidence in assessing ESG factors from a bottom-up perspective.

Investors can reference our two research pieces on the debate around ESG investing and its impact on performance. The pieces are:

How ESG can enhance portfolios – the evidence

Does investing according to ESG principles mean sacrificing returns

Harry: Ultimately, the proof will be in the pudding – the industry needs to be able to post risk-adjusted returns that are at least as good as mainstream portfolios when measured over the medium term while avoiding severe ESG controversies through robust due diligence on non-financial matters.

Henry: Greenwashing is a prevalent issue and every stakeholder from the regulators, investors, consumers and corporates plays a critical role in its prevention.

Effective regulations and industry standards like the IFRS’ International Sustainable Standards Board and the EU’s Sustainable Finance Disclosure Regulation (SFDR) will help raise the disclosure standards and provide more reliable, comparable and verifiable information to investors. Ultimately, with the rapid pace of change, investor education is also increasingly vital to help investors understand the vast world of ESG investment. To support investor education, the abrdn APAC Sustainability Institute has developed a course on best practice sustainable investing.

Harry: European regulation is very much going in this direction by asking investors to start disclosing the principal adverse impact indicators of their portfolios, which will hopefully provide greater clarity around different strategies and their legitimacy.

Harry: As mentioned above, European SFDR regulation has been seminal in defining what ESG is through Article 8 and 9 monikers. For instance, Article 8 products promote environmental and/or social characteristics and may invest in sustainable investments, but do not have sustainable investing as a core objective, whereas Article 9 products have sustainable investment as their core objective. These definitions guide investors in creating investment strategies that are clearly distinct. In May 2022, the SEC proposed that funds with “ESG” in their name would have to clearly define the term and then ensure that 80% of the assets in the fund adhere to this definition. These are very important cues to the investment community for establishing ESG strategies that are well defined and that do not stray from their stated mandate.