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Environmental, social and governance

US$7 trillion annually: the price to pay for a sustainable future

Region’s financiers are starting to realise that they lag behind rest of world in responsible investment strategies

PUBLISHED : Sunday, 24 September, 2017, 2:03pm
UPDATED : Sunday, 24 September, 2017, 2:03pm

Peace, dignity and prosperity for all on a healthy planet by 2030 was the lofty target set two years ago by world leaders in the UN’s Sustainable Development Goals. But governments won’t pay the bulk of the bill: US$6 trillion of the US$7 trillion the UN says is needed each year will have to come from private capital.

Hong Kong, as Asia’s leading asset management centre and international finance hub, aspires to be the regional leader in the development of green finance and the sustainable investment industry.

It has Asia’s biggest pool of funds that meet responsible investment criteria, but, at US$12.9 billion, they form only a tiny part of the more than US$2 trillion overseen by city’s fund managers.

If clients have the option of investing in sustainable and impactful solutions that also have a strong commercial investment case, clients are happy to invest
James Gifford, impact investing specialist at UBS Wealth Management

Moreover, Hong Kong leads a region of laggards. Globally, more than a quarter of all professionally managed assets – or US$22.89 trillion – are held under responsible investment strategies, according to the 2016 Global Sustainable Investment Review. In Asia, excluding Japan, that share is less than 1 per cent.

“Historic lack of demand and lack of investment products are both key factors, but things are changing rapidly,” says James Gifford, impact investing specialist at UBS Wealth Management.

“UBS’s clients are investing heavily in impact-investing solutions when they are available. If clients have the option of investing in sustainable and impactful solutions that also have a strong commercial investment case, clients are happy to invest.”

Marc-Olivier Buffle, senior client portfolio manager at Pictet Asset Management, says: “We see a rise in inquiries and interest [in] ESG in general across Asian investors excluding Japan, but [the] uptick remains moderate. Investors are often confused by the variation of ESG definitions, concepts and scoring systems.”

There is broad agreement about the key definitions and strategies for sustainable, or responsible investment. But some funds filter out stocks that don’t meet certain criteria, such as tobacco companies or coal miners. Others seek out the “best in class”, or push management to make measurable improvements in ESG policies.

Investors are often confused by the variation of ESG definitions, concepts and scoring systems
Marc-Olivier Buffle, senior client portfolio manager at Pictet Asset Management

Another hurdle to investor demand has been the lack of comparable data, Buffle says. “Despite Asia being a large home base for equities, the degree of ESG reporting across markets is inconsistent.”

Hong Kong’s move to require greater and more stringent ESG disclosure may help plug that gap. So will the wider adoption of last December’s G20 Financial Stability Board’s recommendations on climate-related financial disclosure.

Principles for Responsible Investment, (PRI) a UN-backed association whose more than 1,700 members own or manage more than US$73 trillion of assets, plans to align its reporting framework with the board’s recommendations next year.

Fiona Reynolds, PRI’s managing director, says: “We think these recommendations will establish a valuable framework for global investors to understand how the companies in their portfolios are transitioning to a low-carbon environment. In the past, investors have not had access to this data so the report is a real game-changer in terms of being able to more efficiently manage the risks in their portfolios.”

Of 6,300 firms analysed by Trucost, a unit of S&P Dow Jones Indices that advises on ESG issues, only 46 per cent gave standardised quantitative information on carbon emissions; 36 per cent on air emissions; and 21 per cent on water dependency.

“Data is often insufficiently robust, financially relevant or forward-looking, meaning investors cannot incorporate this information into the investment process,” Richard Mattison, Trucost’s chief executive officer, wrote on the global investment news website Responsible Investor this month.

We are still living in a shareholder-driven capitalist society and its obsession with short-term financial measures of progress. This is contradictory to the long-term, stakeholder approach needed for high-impact ESG
Mary Ho, Hong Kong University of Science and Technology’s Business School

Gifford says: “Key ESG risks in the region include water scarcity and air pollution. These also present opportunities, particularly in renewables and water treatment. There continue to be social issues in the region, such as child labour, workers’ rights. And the ‘G’ issues, such as bribery and corruption, and concentrated ownership structures with poor corporate governance, continue to be challenges that fund managers need to consider.”

More transparent and meaningful disclosure should also make it easier to convince investors and asset owners, such as insurance firms, sovereign wealth funds and family offices of the growing threats lurking in their portfolios.

Jean-Marc Champagne, climate finance adviser for the global environmental group WWF-Hong Kong, says changes in policies as governments try to cut out fossil fuels, reduce pollution or rebalance their economies may cause the price of assets to slump, or risk them becoming “stranded” altogether – such as an oil well investment that becomes unviable and has to be abandoned.

“This won’t come about suddenly, nor will it come about from constraining the supply-side of fossil fuels,” Champagne says. “It will come about by a slow, but very steady creep from the demand-side.”

Instead of cutting oil production or imports, governments will implement policies to encourage consumers to buy greener products, such as promoting electric vehicles, Champagne says. “We see this as a place where governments can control and incentivise product uptake, thus putting pressure on the demand for oil and putting further pressure on oil companies’ balance sheets.”

Hong Kong’s government also has a key educational role through the investment policies of public asset owners, which “set the tone” for the market, the Financial Services Development Council said in a report last year.

The Mandatory Provident Fund, for example, would be a good platform to promote responsible investment, says Mary Ho, an independent adviser to companies on ESG issues and a professor at Hong Kong University of Science and Technology’s business school.

She says the compulsory pension fund’s investment horizon gives it the long-term commitment needed to make a meaningful environmental or social impact.

“We are still living in a shareholder-driven capitalist society and its obsession with short-term financial measures of progress,” Ho says. “This is contradictory in almost every way to the long-term, stakeholder approach needed for high-impact ESG.”