The journey to sustainability is a story of transformation.

This, according to the fund managers who participated in The Asset Triple A ESG Fund Management and Investors Awards 2022.

During the evaluation period for the awards, the fund managers revealed to The Asset board of editors that this transformation is happening on two levels.

First, as they seek to generate more alpha for their sustainability portfolios, fund managers are now seeking greater engagement with companies that have lower ESG scores.

Second, as a result of this engagement, companies with lower ESG scores are being transformed into companies with improved ESG scores, resulting in potentially higher alpha for the portfolio.

Based on empirical evidence from Asia-Pacific ESG funds, there is a low correlation between ESG rating/scoring and fund performance.

But although ESG is not the determining factor of stock performance, data indicate that the transformation that is taking place has the potential to generate more alpha for a portfolio.

Fund managers are increasingly allocating to companies with lower ESG scores versus companies with higher ESG scores when doing asset allocation for their sustainability portfolios.

The reason is that they are able to generate more alpha from an allocation to a company with lower ESG score (after the company has improved its low ESG performance) compared to an allocation to a company that already has a high ESG score. Companies with lower ESG scores are usually midcaps and small caps while companies with high ESG scores are usually large caps.

But before the fund managers allocate to a company with a lower ESG score, they ensure that the company has solid financial metrics including current ratio, return on equity (ROE), earnings per share (EPS) and earnings before interest, taxes, depreciation, and amortization (Ebitda). With solid financials, these companies will have the resources to be able to improve their low ESG scores.

The fund managers then engage with these companies through proxy voting to get them to improve their ESG scores by instituting fundamental sustainability reforms to their businesses. With the improvement in a company’s low ESG score, the portfolio is able to generate more alpha.

ESG focus

Another part of this strategy involves allocating to companies with high ESG scores, although these companies are in the non-ESG sector.

There used to be a school of thought that when building their sustainability portfolios, fund managers should only allocate to companies that are in ESG-focused sectors such renewables, waste and pollution management, water management, etc.

In recent years, however, it has become apparent that there are companies outside the ESG-focused sectors that traditionally have high ESG scores. By allocating to such companies – in the financial and technology sectors, for example – fund managers are also able to enhance the alpha of their portfolios.

In most cases, such companies are already part of the benchmark index and the potential for generating more alpha from them is limited, compared with companies with low ESG scores which are normally not part of the benchmark index.

In terms of asset allocation, there are indications that having a 20-30% allocation to companies with lower ESG scores can generate more alpha for a sustainability portfolio.

The caveat to this approach is that there is information asymmetry across the region and ESG scores across data providers may result in a huge deviation. This means fund managers will have to use qualitative and quantitative adjustments as they do their asset allocation.

To address this information gap, large asset management companies have been building their local research capabilities in terms of ESG profiling of companies.

In any case, fund managers agree that, based on available data, ESG is not the determining factor of stock performance. Variables have to be considered in analysis such as constraints of individual funds, as well as the strategies and skills of portfolio managers in such areas as asset allocation and securities selection.

It is only when the majority of fund managers and investors have integrated ESG into valuations that the correlation between ESG rating and fund performance can indicate a strong and positive relationship.

It is in this context that we are announcing the winners of The Asset Triple A ESG Fund Management and Investors Awards 2022.

ESG Fund Manager of the Year

Dhananjay Phadnis

Fidelity Funds - Sustainable Asia Equity Fund

Fidelity International

Dhananjay Phadnis is fund manager of the Fidelity Funds - Sustainable Asia Equity Fund, the company’s flagship fund, which is the only ESG fund among those submitted for recognition that has consistently generated excess return against the benchmark during the awards period.

ESG Asset Management Company of the Year

Asia

BNP Paribas Asset Management – Overall

BNP Paribas Asset Management continued to display its strong commitment and robust approach to sustainable investing with 81% of its public open-ended fund range classified under the new EU Sustainable Finance Disclosure Regulation (SFDR).

Robeco – Institutional

Robeco announced its ambition to achieve net-zero emissions across all assets by 2050. Also, the firm expanded its footprint in Asia-Pacific by acquiring a private fund management (PFM) licence through its wholly foreign-owned enterprise (WFOE) to support its sustainable investing journey in China.

Fidelity International – Retail

Fidelity International has expanded the universe of sustainability products available to retail investors in the region by creating new offerings in the form of Asian equity, fixed income, and thematic funds.

China

Ping An Asset Management (Winner)

Ping An Asset Management has been steadily expanding its ESG investing capabilities. It has been actively engaging with investee companies, helping them to enhance their ESG performance. Adding to its sustainable investing themes, the company is also looking at investment opportunities in social spheres such as poverty relief and inclusive finance.

China Asset Management (Highly Commended)

China Asset Management Company (China AMC) published its responsible investment policies and committed to achieving net-zero carbon emissions in its operations, becoming the first mutual fund house in China to announce specific timeline and roadmap towards carbon neutrality. It also set up a goal to confirm the carbon footprint baseline at the portfolio level and relevant carbon reduction targets by 2025.

Malaysia

BNP Paribas Asset Management (Winner)

BNP Paribas Asset Management’s investment teams in Malaysia apply global ESG policies to the stock screening process that comply with the UN Principles for Responsible Investment. They also define and apply ESG criteria to all investment decisions, and facilitate integration of sustainability throughout the organization.

Principal Asset Management (Highly Commended)

Principal Asset Management enhanced its internal ESG research by establishing Internal Sustainability Assessment which allows its analysts to use third-party research as a guide or reference, in addition to engaging with issuers and investee companies and undertaking core fundamental research, to assess sustainability risk ratings and trends. During the awards period, the company engaged with at least 11 companies in Malaysia as well as with companies outside the country.

South Korea

Shinhan Asset Management

Shinhan Asset Management launched a number of sustainability products in 2021. ESG evaluation is conducted by combining external professional evaluation agencies and internal research systems to invest in companies with sustainable growth potential in the long term.

Taiwan

Cathay Securities Investment Trust

Cathay Securities Investment Trust (Cathay SITE) has built an in-house ESG rating system for the use of its internal investment team. The rating system has five grades from A to E, using an internal calculation method that incorporates data from MSCI ESG Rating, Taiwan Corporate Governance Evaluation, and MSCI controversy flags.

Editors’ Triple Star

LGT Capital Partners

The company’s ESG Report 2021 highlights achievements, outcomes as well as goals of its ESG approach.

Maitri Asset Management

The company joined the Asian Net Zero Asset Managers initiative in 2021, became one of the first two Asian Net Zero Asset Managers initiative signatories to outline net-zero targets, and committed to managing 50% of its assets under management in line with net zero by 2030.

Capital Investment Trust

The company has developed its own ESG quantitative rating mechanism which adopts three ESG positive principles and two negative factors. The mechanism is incorporated into its domestic stock-picking process.

Krungsri Asset Management

The company launched the Krungsri Equity Sustainable Global Growth Fund, an ESG-themed fund that seizes investment opportunities from global stocks with sound fundamentals and innovations corresponding to the 17 UN Sustainable Development Goals.

Link REIT

The company has been actively pursuing efforts to enhance its ESG performance through activities such as green building and waste management.

Please click here for the full list of winners.