Among the 794 licensed asset management firms which responded to the SFC’s survey, 660 considered at least one ESG factor when evaluating a company’s investment potential, and of these, 68% saw ESG factors as a source of financial risk that have an impact on their investment portfolios.
Yet, only 35% of the 660 firms consistently integrated ESG factors in their investment and risk management processes, and 68% said that information about their own ESG practices was not available to outsiders.
“Even more did not disclose climate risk assessments,” noted the report, released this week.
As a result, the SFC intends to focus on promoting the management of climate change risks in asset management by developing standards and providing practical guidance and best practices.
It will also set up an industry group to exchange views with experts on environmental and climate risks.
Suggested processes used to manage climate risks include incident monitoring mechanisms which flag major climate change-related incidents so that portfolio managers adjust investment portfolios, and incorporating results from ongoing climate risk assessments in the development of the firm’s investment strategies.
However, the SFC’s concern is less about the physical impact of environmental damage or climate change, and more about the financial effects.
“ESG risks, in particular climate risks, could have a potentially material impact on underlying asset values, and in turn, an investment portfolio’s performance and risk-return profile,” noted the report.
Only 23% of the 660 asset management firms have processes in place to manage the financial impact of risks arising from climate change.
Hence, the SFC “takes a financial risk perspective when it looks at how the asset management industry considers ESG factors”.
Good intentions
Despite the general failure to address ESG concerns up to now, nearly two-thirds of all the asset management firms surveyed, regardless of whether they already consider ESG factors or not, plan to strengthen their ESG practices in the next two years, according to the survey.
During that time, many are also thinking about disclosing more information to the public about their ESG investment practices and how they manage climate risks.
Furthermore, most of them are also in favour of strengthening ESG disclosure rules for listed companies, as proposed by the Hong Kong Stock Exchange in May, so that more “high quality, decision-useful ESG and climate change-related information could be available for use in their investment and risk management processes”.
The survey was one of the initiatives in the SFC’s “Strategic Framework for Green Finance”, published in September 2018. Subsequent initiatives included a survey on integrating ESG factors in asset management in March this year, and published guidance on enhanced disclosures for green or ESG funds in April.
The Hong Kong Monetary Authority (HKMA) formally embraced the SFC’s stance when it announced in November that it would give priority to green and ESG investments, if the long-term return is comparable with other investments on a risk-adjusted basis.
ESG factors are also included in the selection, appointment and monitoring of the external managers of the HKMA’s HK$4.16trn ($530bn) of Exchange Fund assets.
The SFC’s latest survey found that asset management firms which systemically integrate ESG factors most often use investment strategies such as negative and exclusionary screening, corporate engagement, shareholder action and ESG integration (see table below).
“More than half adopt multiple ESG investment strategies as their practices mature and more ESG data becomes available,” it said.
However, there is a gap between the expectations of asset management firms and their clients, the asset owners, many of whom are “not entirely satisfied” with the ESG investment services provided by their managers.
The gap in expectations has widened due to the limited number of ESG investment product offerings in the local market.
Other industry monitors in Asia, such as Morningstar and the Hong Kong Investment Funds Association, have also warned about greenwashing, with some mutual funds spuriously claiming ESG credentials to entice investor flows.
A central database of SFC-authorised green funds will soon be available on the SFC’s website to make disclosures more transparent and comparable.
ESG investment strategies
