Putting sustainable investing at the core in Asia

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Sustainable investment strategies are gaining momentum in Asia Pacific as ESG issues such as climate change, air pollution and plastic waste become more salient and the evidence linking sustainable investing and positive investment performance builds.

  • ESG investing is growing rapidly, both globally and in Asia
  • Sustainable investing enhances company and stock performance
  • Our robust ESG integration framework includes a strong stewardship approach

ESG investment strategies are growing rapidly globally

The growth in sustainable investing has begun to reshape the asset management landscape – between 2016 and 2018, global assets under management in sustainable investment strategies rose from USD 23 trillion to USD 31 trillion. Europe remains the largest market globally for sustainable investing with USD 14 trillion of assets in 2018. However, strong growth has been seen globally between 2016 and 2018, from the US (+38%) to Australia (+46%) to Canada (+42%).

In Asia Pacific, growth in Japan has been staggering – from USD 474 billion in sustainable assets in 2016 to today’s figure of nearly USD 2.2 trillion. The drivers fuelling this 307% rise include:

  • Japan’s first Stewardship Code (February 2014), encouraging institutional investors to engage with the companies in which they invest
  • The Corporate Governance Code (June 2015), setting rules on whistleblowing, disclosure and stakeholders’ rights
  • The Government Pension Investment Fund (GPIF) becoming a PRI signatory in September 2015 and encouraging external asset managers to enhance investment stewardship and ESG integration

Across Asia Pacific, a range of stakeholders has energised the adoption of ESG investment strategies, including governments and regulators, companies, asset managers and data providers. However, the rapid growth has also contributed to a number of challenges for investors which we outlined in The rise of sustainable investment in Asia Pacific – good stewardship is key.

Doing good while doing well – sustainable investing and alpha

Proof that sustainable investing can help generate better risk-adjusted returns is mounting. It is becoming increasingly clear that investors can ‘do good while doing well’.

For example, a 2015 University of Oxford study based on over 200 academic studies showed that in 90% of the cases, sound sustainability standards lowered the cost of capital of companies. In 88% of the studies, solid ESG practices resulted in better operational performance of firms, while 80% highlighted a positive influence on stock price performance from good sustainability practices.

Furthermore, from a BCG study in late 2017 of how the total societal impact of a company affects its financial benefits, the top ESG performers were able to reap higher valuation multiples (of between 3% and 19% more than median performers) and greater margin benefits (of up to 12.4%).

Investment stewardship and improving the ESG performance of companies can also be a source of financial performance for investors. MSCI research in November 2018, for instance, showed that companies’ ESG momentum was a driver of performance across developed and emerging markets.

Clarity in implementation and avoiding greenwashing

The key is to provide investors with a straightforward, actionable framework for analysing business risks and associated ESG risks in parallel.

To make it practical for implementation, analysts and portfolio managers integrate ESG factors into each stage of BNPP AM’s investment processes. This ranges from the investment philosophy, research and idea generation, and portfolio construction, to engagement and reporting.

For example, we do not invest in a public entity without an ESG score or in a private entity without performing ESG due diligence. Not do we invest in an entity with a weak rating without actively engaging on the key issues identified. In fact, we might disinvest from weakly-rated entities which do not respond to engagement. Our goal is to hold portfolios with more positive ESG characteristics and a lower carbon footprint than their respective benchmarks.

This clear-cut ESG integration framework assures investors that they can avoid the risk of greenwashing. It enables them to distinguish between companies that treat sustainability issues as a public relations exercise and those that ‘walk the talk’. It highlights the importance of engaging directly with companies to assess their culture, performance and engagement on ESG issues.

In short, we believe that our robust ESG integration framework with its strong stewardship approach can enhance risk-adjusted investment returns.

Our commitment to be a ‘future maker’

Our Global Sustainability Strategy has enhanced our commitment to sustainable investing. Yet this goes beyond our goal to expand ESG integration and sustainable investing across all investment strategies by 2020; it is about delivering long-term returns for investors via sustainable assets in alignment with the future economy.

As a ‘future maker’, we are striving to use our investments, our voice and our leverage to positively influence the behaviour of entities as well as the regulatory framework. This means shaping a better future in three critical areas: energy transition, environmental sustainability, and equality and inclusive growth. Our targets and key performance indicators include the percentage of female board members, forest and water footprints, the share of assets that is ‘green’ and aligning our investment portfolios with the Paris Agreement by 2025.

At recent events in Hong Kong, Singapore and Tokyo, BNP Paribas Asset Management speakers highlighted these trends and called on the financial community to join BNPP AM as ‘future makers’ and help drive the transformation to a more sustainable and inclusive economy.

Jane Ambachtsheer, Global Head of Sustainability, said: “The industry movement towards sustainable investing is here to stay. We are fully committed to innovation and research to enable us to deliver sustainable investment returns to clients. As growth in sustainable investing continues and deepens beyond asset owners to retail investors, the latest trends from Europe can help give an idea of what may be coming to Japan. There are various approaches to assessing ESG factors, which provide a lot of opportunities for investment managers to find new sources of value.”

Alex Ng, Chief Investment Officer, Asia Pacific, said: Doing good and doing well are not mutually exclusive. Exclusion should be the last resort; we should look to engage with companies with a belief they will adapt to requirements for them to be more sustainable. 

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Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher than average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity, or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

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