The limits of ESG screening

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Governance is the most important factor in ESG investing, says Marc-Oliver Buffle, Geneva-based senior product specialist at Pictet Asset Management. But can you really screen for it?

Buffle acknowledged that ESG screening, in particular the “G” or governance, does not provide indicators to detect all companies that may commit fraud.

By taking ESG into consideration and integrating it into the investment process, investors can mitigate the probability of investing in a company that may commit fraud, he believes.

What investors can do is look at the track record of management and check for controversies that a company has generated over the last few years. If a company had a lot of controversies in the past, it is most probable that it will have more controversies in the future, unless there has been a significant change in management and operations.

“It is all a game of statistics with the goal of decreasing as much as you possibly can that you will be involved in these kinds of companies. If you can decrease the probability by 5%, that’s already a big gain.”

There is no standardisation of ESG data across the asset management industry, he said. The firm makes use of different sources for ESG screening, such as Sustainalytics, Reprisk and MSCI. It also uses investment research firm CFRA specifically for accounting practices.

However, he did not explain how the screening is more rigorous than simply employing the best practices of traditional due diligence, which is a standard procedure of portfolio managers across the industry.

Recently companies in the auto industry have been involved in the massive emission scandal, which went on for about a decade. Nonetheless, these companies had won awards or received recognition for various ESG practices and/or inclusion on ESG or socially responsible (SRI)-type indices.  Volkswagen is the centerpiece of the scandal, but a long list of other environmental stewards including Bosch, General Motors and Peugot are under investigation.

Slow uptake in Asia 

Asset managers as well as institutional investors in Asia-Pacific still lag global peers in implementing ESG practices in their portfolios.

Globally, there are around 1,833 signatories in the Principles for Responsible Investment (PRI), which is an organisation that promotes ESG inclusion in investment processes.

In Asia-Pacific including Japan and Australia, the number of signatories goes down significantly to 239. Excluding Japan and Australia, the region has only 52 signatories.

PRI Signatories

Global

Asia-Pacific (including Japan and Australia)

Asia (ex-Japan, Australia)

Asset owners

363533

Investment managers

1,238

154

39

Service providers

232

32

10

Total

1,833239

52

Source: PRI, Asia: China, Hong Kong, India, Indonesia, Malaysia and Singapore

“Clients and investors in Europe and the US are in a slightly more advanced stage when looking for ESG,” said Amy Cho, the firm’s managing director and regional head for Asia-Pacific ex-Japan.

Some investors in Asia, particularly institutional investors, are starting to look for ESG products, but there has not been much interest from retail investors, she added.

She acknowledged that much of the institutional drive comes from Asia’s developed markets − Australia and Japan − with a number of them being pension funds and insurance companies.

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