Asia still lags behind other markets, particularly Europe, in integrating environmental, social and governance (ESG) practices, Emily Chew, managing director and global head of ESG at Manulife Asset Management said in Hong Kong on Tuesday.
“When we look at the state of ESG integration practice, it is very market specific,” Chew said at the Thomson Reuters Asia Pacific Buy-side Summit 2018. “On average, ESG integration practices remain behind in Asia. Australia is quite advanced compared with the rest of eastern and South-East Asia. Meanwhile, Japan is the market where we are seeing the fastest uptake, and more and more sophistication of practice along the asset management community, very much driven by the Government Pension Investment Fund and the asset owner community in that market.”
In 2016, GPIF put out a tender for ESG indices for Japanese equities, and in November last year asked for applications for the environmental index for global equities. Japan’s $1.4 trillion pension fund is reasonably new to ESG investing and become a signatory to the United Nation’s Principles for Responsible Investment (UN-PRI) in September 2015. GPIF president Norihiro Takahashi said publicly last year that the pension fund is planning to raise its allocation to ESG investments from 3 percent to 10 percent of its stock holdings over time. GPIF has selected FTSE Blossom Japan index, a new index compiled by FTSE Russell for the Japanese pension fund, as well as MSCI Japan ESG Select Leaders index and MSCI Japan Empowering Women index.
In addition, Future Fund, Australia’s A$163.9 billion ($127 billion; €103 billion) sovereign wealth fund is planning to insulate its portfolio from possible risks due to technological disruption in areas such as artificial intelligence and robotics, according to local media reports. The investor has a 12.1 percent exposure or roughly A$16 billion to private equity via direct investments and fund commitments, as of end-December 2017.
Meanwhile, Chew noted that ESG is also attracting more interest in other markets like Malaysia, Singapore, Korea and China, and asset owners are thinking how to use ESG to enhance long-term returns.
“That’s particularly the concern from asset owners in this region, who are starting to unlink their very long-term time horizon with the materiality of long-term ESG issues such as climate change, demographic shifts and disruption.”
She emphasised that ESG’s meaning in Asia is also “ever evolving”, where yesterday it was environmental pollution; today is climate change; and tomorrow is about data security and the changing consumer demands of millennials.
Asked about the state of ESG in Asia in the next five years, Chew said she expects to see a lot more requirements from institutional investors in the region for evidence of ESG integration. “If you can’t demonstrate that, you will be potentially missing out on mandates,” she noted.