Client demand, an awareness of shifting consumer preferences and a calculation of future risk-returns have forced asset managers to include ESG metrics in their investment processes. However, there is another source of pressure – regulatory action – that is placing them under tighter scrutiny and is normalising ESG adoption.
The Paris Agreement to reduce greenhouse gas emissions mitigation, signed in 2016 by 195 countries, was the catalyst for extensive government initiatives towards fostering corporate and investment practices that considered environmental impact.
The Covid-19 pandemic and the lockdowns imposed throughout the world, including in Asia, might prompt further prescriptions.
“We expect renewed urgency to be placed by global governments on addressing climate change and setting higher environmental standards, with the positive impact of dramatically reduced fossil-fuel burning activities documented with the economic shutdown,” Julie Koo, Asia-Pacific head of managed investments at Citi Private Bank, told FSA.
“This will likely lead governments to consider stepping up their commitments in renewable energy technology and infrastructure – which may also be seen as a more sustainable way to stimulate growth in their economies,” she added.
Many Asian countries are already on a path towards promoting and regulating environmentally-friendly investment and finance through promoting green bonds (China), drafting environment risk management guidelines to asset managers (Singapore), or providing ESG indices on its stock market (Japan).
However, Hong Kong has been the most determined to develop an accountable and transparent ESG regime for investment products sold within its jurisdiction.
Hong Kong initiatives
Hong Kong’s Securities and Futures Commission (SFC) established a framework for green finance in September 2018, whose action-items included enhancing disclosure by listed companies of environmental information (in particular climate-related disclosure) and conducting a survey of asset managers and asset owners on their sustainable investment practices.
The Hong Kong Stock Exchange responded to the first of these SFC’s initiatives in December 2019 by insisting that listed companies include a statement from the company board setting out its consideration of ESG issues.
As for the second action item, the SFC published a circular in April 2019 to provide guidance to management companies of SFC-authorised funds with an ESG investment focus. It released the results of its survey of asset managers in December 2019, indicating that it planned to develop standards and provide practical guidance on the management of climate change risks in asset management.
The SFC presented a list of ESG-approved funds (there are now 30 of them) that meet its disclosure requirements aimed at countering so-called “greenwashing” – where funds or the companies they invest in make false or unsubstantiated claims about their environmental or social credentials.
These new disclosure requirements include the fund’s investment focus, ESG analysis and evaluation methodologies and what the firm believes to be relevant “green” or ESG criteria. The requirements were set out by the regulator in April last year.
“Although most funds [evaluated] have named the green or ESG factors in their investment objective or strategy, a majority of these funds do not specifically disclose how the management companies incorporate such green or ESG factors in their investment selection process,” the SFC said at the time.
To reinforce the official stance, last year the Hong Kong Monetary Authority (the territory’s central bank) announced three measures to support green finance development, including a common framework to assess the “greenness” of banks, giving priority in its exchange fund to green and ESG investments if the long-term return is comparable to other investments on a risk-adjusted basis, and setting up a centre for green finance to serve as a platform for technical support and experience sharing for the green development of the banking and finance industry.
Meanwhile, the Covid-19 pandemic might galvanise policy makers and regulators in Hong Kong and elsewhere in Asia to promote more focus on the social and governance factors of the ESG criteria.
“Although the focus of ESG investments was more on the environmental aspects prior to the current crisis, the pandemic shows that social considerations are also of the utmost importance, as well as the frameworks and policies established through good governance structures,” Markus Mueller, global head of the chief investment office at Deutsche Bank Wealth Management, told FSA.
“Governance aspects, such as accounting methods, shareholder input, conflicts of interest, illegal practices and political influence come increasingly into the spotlight, while the need for stability and improvement of health systems, fair payments for critical worker groups, international collaboration and the shielding of the weaker parts of the society all fall within the ESG orbit,” he said.