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The FSA Spy market buzz – 17 May 2019

Views on ESG in Asia from a wide range of banks, wealth managers and consultants and so much more.

Regular readers of Spy will notice that this week your humble investigator has switched his usual incognito brown mackintosh for a rather snappy green number and a glass of organic wine. There is a good reason for this and it is not merely the change of season or Hong Kong’s penchant for fashionable sartorial updates. Spy has been Green hunting. Yes, he has been scouring the industry for views on all things Green, ESG, socially responsible or Impact, with a capital I.

Depending on one’s politics or one’s investment outlook,  Spy has found fewer investment areas that divide people as much as ESG and associated Green Investing. Rather like Brexit, Donald Trump, The Belt and Road Initiative or the Guangdong-Hong Kong-Macao Greater Bay Area, passions are aroused and tempers flare quickly when the conversation drifts to these treacherous waters. It used to be said that one should leave out sex and religion at social gatherings – those, now, all seem far tamer than these four humdingers.

Spy’s colleagues at ESG Clarity are running their first Symposiums in Asia in a few weeks’ time. To gauge attitudes to ESG investing and its importance, they have been posing questions to the Asian wealth management industry, and, unsurprisingly, a range of punchy opinions have emerged.

Two specific questions were sent to hundreds of industry protagonists:

  1. How much do ESG investments currently contribute to your clients’ portfolios?
  2. Do you see this increasing or decreasing over the coming months and years?

The responses may not reflect the official views of the organisations these individuals work for and therefore Spy is sparing any blushes by not naming names. However, rest assured, these are real, unvarnished opinions from the factory floor, so to speak.

First up, a senior executive from a large American bank: “I remain deeply sceptical of the many claims made about ESG investing, and have yet to be convinced of the immediate advantages it would bring to the fund management industry. Long term is a different matter. Nevertheless, I would certainly be interested in hearing more, it might even get me to change my views!!”  This sentiment was repeated by a large number of respondents – outright scepticism bordering on the verge of cynicism.  The Americans and the Chinese may be engaged in a rather vicious trade war, but it seems their bankers do agree on this point, because a respondent from a very large Chinese bank had this to say: “ESG is not my concern nor my customers’ concern so the contribution is zero…Overall, I can see there will be [a] slight increase in years [to come] but not on my side.”

A Swiss banker commented: “I do see some [ESG] potential globally, but most Asians are not so keen given the general lower return perception of these funds. Clients in the region care more about returns than anything else.” Now, where has Spy heard this sentiment before?

Another banker with a large Swiss PB was a little more positive: “Certainly this [ESG] allocation looks to increase in two ways: 1) Existing funds implementing an ESG / sustainable overlay, or similar considerations in their investment processes / guidelines.  2) Clients actively searching for solutions within the ESG / sustainable space where the process adds value or has a potential to outperform the broader peer group.” Spy found this one particularly insightful – that is, predicting the ESG space will grow in Asia almost by stealth as the change happens at the fund level without the clients having much input into the process.

A boutique Swiss bank in Hong Kong responded as follows: “Currently ESG is not a selection consideration. Whether we will include ESG in our selection depends on clients’ demand. As much as ESG is gaining attention in the institutional and single family office space, this consideration is yet to pick up momentum in the private wealth and multi-family office space.” Spy has heard this view a few times – that really big money is on board with ESG but vanilla private wealth management lags behind.

“Still [a] low contribution (we are actively working on it)”, claimed one respondent from a large Asian private bank. For them it is “increasing” and this was said with more than a touch of enthusiasm. Spy was encouraged by the Asian positivity.

A Singapore-based wealth manager was brutally honest, “I don’t believe in it. Investors should maximize their return and then donate to their favourite cause. Mixing charity with investment is inefficient.” Spy has heard this before from several long term wealth management people. This has a touch of Adam Smith’s famous maxim that the purpose of a business is to maximise profits. That may have been true in 1776 when he wrote “The Wealth of Nations”, but the world has changed a tad and Spy thinks many younger people may now disagree with that word “maximise”.

An independent fund consultant in Hong Kong had this to say: “[We have] a strong conviction in ESG and as a consultant, we are delivering the same message across to our clients.” The cynic may reply that this is just consultants giving themselves another reason to be paid, or the prescient may argue, “this is the way the wind is blowing since consultants have so much institutional sway”. Take your pick, thinks Spy.

The Hong Kong arm of a large Japanese wealth manager said: “[It is] increasing, but [will] not materially unless there is a strong enough intervention from the regulators against listed companies or asset managers, that puts all players on an equal playing field.” Spy has more than a touch of sympathy with this view. The wealth and asset management industry often needs to be pushed before it jumps.

It is often the north Europeans that are considered the most pro-ESG and this response from a  sophisticated British wealth manager based in Singapore, rather sums up the beliefs of the ESG industry: “Misconceptions around underperformance of ESG products are still prevalent and more education is definitely needed with both RMs and end-clients. However, I do think the ESG wave will catch on here in Asia and it is crucial for the industry here to grow and offer their ESG products for when the demand comes strong down the road.”

No doubt this is just the beginning of the debate.

Until next week enjoy a plastic-free, organic, sustainable and happy seven days…

Part of the Mark Allen Group.