Growing wealth and doing good can co-exist, says former property tycoon’s heiress

Applying environmental, social and governance principles when creating an investment portfolio is alien to most people in Hong Kong – but the practice has a strong following elsewhere

PUBLISHED : Friday, 06 January, 2017, 11:13am
UPDATED : Monday, 09 January, 2017, 5:18pm

In Hong Kong, few investors, big or small, have thrown themselves deep into the emerging and uncharted business of sustainable investing, which aims to do some good for society and the world besides making a return; Annie Chen is one of them.

Chen, the youngest daughter of Thomas Chen Tseng-tao, the former chairman of Hong Kong property developer Hang Lung Group, has scratched beyond the surface of investments with sustainable and responsible investment themes.

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She embraced what is known as the “total portfolio” approach, which completely immerses her capital into investments that meet her sustainability criteria and impact objectives, and generate financial returns to support philanthropy grants every year.

The “transformation” of her personal fortune carved out from that of her family after a restructuring of her family’s assets took seven years, and the journey has not been an easy one due to the local “under-developed impact investing ecosystem”, she said.

It meant she had to enlist the help of professional impact investing advisors from Europe and the United States, and learn the tricks of the trade through intensive research and by attending philanthropy and family office conferences.

“We started by speaking with private banks six to seven years ago to help our transformation, but they could only offer funds with themes like water or renewable energy,” she told the Post in an interview. “They couldn’t offer any holistic solutions.”

She said despite being a regional financial centre, Hong Kong lagged behind other centres in the West as well as some markets in Asia on the pace of development of sustainable investment, both from the perspective of demand and supply of such expertise.

“Many investors are hesitant to embrace sustainable investing because they have the perception that one must give up some returns in order to do some good to society through investments,” she said.

“There is still an information gap between perception and reality.”

According to a September CLSA research report, at least three major studies in the 12 months prior to its release have shown a positive correlation between companies’ financial performance and their environment, social and governance (ESG) achievement.

The biggest of the three is by Deutsche Asset & Wealth Management and the University of Hamburg, which reviewed more than 2,000 cases and found that 63 per cent showed a positive correlation, versus 10 per cent that displayed a negative relationship.

Chen said the “total portfolio” approach could help break down the “psychological barrier” for would-be sustainable investors, since value creation was measured on a “blended” basis across the whole portfolio.

It may take quite some time for investors to accept such an approach, judging from the findings of a recent survey by Switzerland-based asset manager Lombard Odier specialising in serving high net-worth clients.

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While 97 per cent of over 100 respondents to its survey said they wanted to allocate more money toward investments that did some social good besides making returns, only 10 per cent said they would allocate 50 per cent or more of their wealth into environmentally sustainable and socially responsible investments, while 49 per cent said they would allocate less than 15 per cent.

Some 60 per cent said they would achieve this by shifting money out of existing equity and fixed-income investments, while 23 per cent preferred to reallocate money from their charitable donations.

Chen’s fortune is managed through RS Group, a Hong Kong-based family office chaired by her, which in 2015 completed its “transformation” after divesting fossil fuel investments and exiting its legacy private equity investments.

Some 71 per cent of its investments and grants are allocated to North America and Europe, with 23.6 per cent in Asia.

It achieved an average return of 5 per cent over the five-and-a-half years to June 30, 2015, which is comparable to the 5.2 per cent return of the weighted average of global stock and bond investment benchmarks.

Although 5 per cent may not be considered high by some people, Chen considers it “respectable” and met the needs of her family and her social impact objectives.

Of the total portfolio, about 61 per cent was put into liquid stocks and bonds of companies that met sustainable and responsible investment criteria, while 30 per cent was allocated to “targeted impact” investees with specific mandates to develop solutions for environmental and social problems.

Chen’s big leap into the “total portfolio” approach was facilitated by the family fortune carve-out that gave her greater control on how she would manage her share of the assets, and built on her own philosophy on wealth management.

“The [environmental and social] problems and challenges we face today are so great that we simply cannot afford to let ‘wealth preservation’ be our main objective,” she wrote in RS Group’s first impact report.

“Our legacy is the world we leave behind for our children, not how much is in their bank accounts.”

She also questioned the approach by many of Asia’s rich in maximising their investment returns first, before giving back to society through philanthropy.

“The traditional practice of investing solely for financial gain and putting some of the profit towards ‘good’ causes is no longer sufficient or appropriate to deliver a net positive outcome,” she wrote. “Investing in the wrong companies will add to the world’s problems, which are huge and pressing, while governments are limited in their effectiveness and mandate.”

She said Hong Kong’s government entities and corporations should take more leadership on sustainable investment to boost the demand for and supply of local expertise.

“Pension funds, which have long term obligations and investment horizons, are well suited to take a leadership role in ESG investing, which in itself helps the fund managers become more informed and better at managing investment risks and tap into new opportunities.”

Stephen Tong, an investment consultant at global professional services firm Willis Towers Watson, said Hong Kong’s move to sustainable investment was slow.

“We haven’t noticed much demand for ESG investing-related advisory in Hong Kong, compared to Japan, Taiwan and South Korea where clients have proactively enquired about how it is done overseas.”

Asset managers increasingly turn to sustainable investment strategies

In Japan the world’s largest pension fund, Government Pension Investment Fund (GPIF), which manages the nation’s national pension and government employees’ pension funds, late in 2015 signed up to the Principles for Responsible Investment, the world’s leading proponent of responsible investment.

This means the GPIF has voluntarily committed to incorporating ESG issues into its investment analysis and decision-making processes and demand ESG disclosures from its investees.

Tong said: “In Asia, many asset managers still see sustainable investment only as a risk control tool to exclude certain sectors such as tobacco, rather than adopting a proactive and broader approach to build a portfolio with their own sustainable criteria.”

Priscilla Luk, senior director of global research and design at investment benchmark indices provider S&P Dow Jones Indices, said she had yet to come across clients in Hong Kong that asked for her firm’s service for the purpose of launching a sustainable fund, or implementing an ESG investment mandate.

“But ESG is a hot topic in local investment forums in recent months,” she said. “Corporates want to know how to make ESG disclosures and investors want to know how to assess ESG performance, but there is a gap between disclosures and investors’ expectations due to a lack of standardised ESG measures.”

Doris Ho, executive director of the Hospital Authority Provident Fund Scheme which manages more than HK$58 billion of assets for its members, said although the scheme did not have a specific ESG mandate, ESG formed part of its periodical asset allocation policy reviews, and its fund managers did integrate ESG principles in their investment process.

While the rising number of service suppliers provided ESG ratings on potential investees had helped the implementation of investment incorporating ESG considerations, their subjectiveness was a challenge for coming up with a mandate, she said.

“ESG is a rather complicated topic as it involves three big factors,” she told the Post. “Should a company which has high scores in one or two of the three factors but low for the others be considered? Or do we set a minimum standard for each of the three factors?”

A spokesman at the Hong Kong Monetary Authority, which oversees the management of Hong Kong’s HK$3.5 trillion Exchange Fund whose investments include stocks and bonds, said the authority supported ESG principles and had adopted the voluntary and non-binding “principles of responsible ownership” issued by the Securities and Futures Commission, under which the authority agreed to “encourage” its investee firms to have policies on ESG issues and “engage” with them on the issues.

“We will continue to closely monitor the development of ESG standards and assess the suitability for integrating these standards into our investment process,” he added.