ESG consideration is gaining more acceptance from investors across the Asia-Pacific (APAC) region, according to the APAC results released by Franklin Templeton of a comprehensive global study on ESG adoption, implementation and development across institutional and wholesale asset owners globally. The study was conducted by NMG Consulting.
ESG considerations gain acceptance
Results show investor predisposition towards ESG investing in APAC is rising rapidly, but investment adoption and application methods differ across the region. Globally, ESG is now a central consideration for asset owners, with a large majority building their capabilities in this area. The study shows that two-thirds (67 percent) of APAC respondents now consider ESG an important component within the investment process. Across APAC, 71 percent of asset owners are investing to increase their ESG knowledge and expand their investment capabilities in this area.
Early ESG adopters are confident of higher returns
As ESG considerations gain acceptance, there is a high degree of consensus on the risk benefits, but differences of opinion on the impact on returns. ESG adopters in Australia and New Zealand (ANZ) in particular, no longer accept that ESG investing must mean accepting lower rates of return. An impressive 94 percent of ANZ respondents believe that ESG investments will in fact enhance returns. While ANZ leads in this belief, other Asian countries are not far behind with 80 percent holding this view across the rest of the region.
‘Governance’ factors key, ‘Environmental’ concerns are rising
The study found that the three components of ESG investing (Environment, Social, and Governance) have become interdependent as asset owners globally now view them as linked. Overall, European asset owners focus on a broader set of ESG issues, reflecting the region’s longer track record on responsible investing, while APAC and North American ESG adopters tend to have a narrower focus. However, in APAC, of the two prioritized criteria “environment” and “governance”, shifts in priority over time has seen “E” becoming more important. Seventy percent of respondents consider environmental factors as their first or second priority among the three factors.
Stephen Grundlingh, managing director and head of institutional (ex US), Franklin Templeton, says, “ESG considerations are becoming increasingly prominent across APAC, and large asset owners and asset managers are collaborating to capture the benefits of ESG. The world today is facing a growing number of complex and interconnected challenges; from slowing global growth and persistent economic inequality, to climate change and geopolitical tensions. Many of these risks are ultimately ESG related and are increasing in likelihood and impact.”
While environment is rising in APAC, overall corporate governance (71 percent) ranks number one amongst APAC asset owners in terms of ESG priorities. This is followed closely by the specific environmental impact of climate change (67 percent). Sustainability (56 percent) and corporate corruption (54 percent) are also seen as significant concerns.
The emphasis on corporate governance could be attributed to the fact that APAC investors (with the exception of Australia and New Zealand) often have large exposures to emerging Asian markets where disclosure and corporate governance standards are less developed than in Europe and North America. For APAC asset owners, the need to strengthen corporate governance is a long-standing preoccupation that predates responsible investment frameworks.
Data Is both a challenge to, and a potential catalyst for, more rapid ESG adoption
The earlier stage ESG adoption in APAC (ex-Australia and NZ) in part reflects the relative scarcity and quality of ESG data. Data providers offer less ESG information on average for APAC investors compared globally and the lack of high-quality data is an impediment to wider ESG adoption. Despite some progress in this area, many investors say they still struggle to find vendors with a full suite of ESG information for prospective investments. Some 41 percent of the respondents quoted access to data as a key challenge in introducing ESG policies.
Subash Pillai, head of Client Investment Solutions APAC, Franklin Templeton Multi-Asset Solutions, says, “Concurrent with the growth in demand for responsible investing, the complexity of ESG issues now plays a pivotal role in the asset management industry, resulting in a wider range of options and more sophisticated products. Despite the limitations in data, definitions, and resources, investors are increasingly incorporating ESG-related approached in their portfolios. As active stewards of our clients’ money, we fully integrate considerations of ESG risks and opportunities at every stage of our investment process.”
ESG considerations increasingly become one of the key factors in investment analysis
Overall, the improvements in perceptions regarding returns from sustainable investing, greater availability of ESG data, and increasing ESG-related activity by regulatory bodies will encourage asset owners and managers to incorporate ESG considerations into their investment analysis.
Manraj Sekhon, chief investment officer of Franklin Templeton Emerging Markets Equity (FTEME), concludes, “ESG factors can have a material impact on a company’s current and future corporate value; consideration of these is integral to the rigorous fundamental bottom-up research our team conducts. We take a holistic approach in assessing ESG, considering both developed and emerging markets perspectives.”
“Businesses with a market leading approach to ESG are often characterised by superior management teams, greater long-term earnings sustainability and higher valuations. Accordingly, those companies where material improvements in ESG are being seen can represent excellent investments. Having direct local insights enables us to identify those on the cusp of change. While there are global leaders in ESG among emerging market corporates, there remain many opportunities to engage to help effect change, driving returns to shareholders. Improving governance in particular has become a structural theme driving emerging market equities,” adds Sekhon.
