Sustainable investing gains traction in Asia
Sustainable investing is making its way to Asia as the number of socially aware investors is increasing along with the growing middle class, as more people seek to support businesses that make positive contributions to society.
The market for environmental, social and governance (ESG) investing, as it is also known, is estimated to be worth around US$23 trillion. It includes socially responsible investing, mission-related investing, or screening for environmental, social and governance factors alongside financial factors in the decision-making process.
“Why (adopt ESG) now? The answer to 99 out of 100 questions is money but in truth, there are a lot of drivers and client demand is undoubtedly one,” said Robert Hardy, head of the corporate governance team of JP Morgan Asset Management in London.
“That’s certainly true in Europe where pretty much every new client we see asks what we think about this or that listing in their portfolio.”
Factors reflected in ESG investing can include climate change, renewable energy, green buildings, human capital and labour management, corporate governance, gender diversity, privacy and data security, corruption and many other criteria. A mining company and a financial company, for example, may face different key ESG risks and opportunities.
“There is no doubt that there is also government pressure from government regulators that are constantly trying to avoid a financial crisis by encouraging us all be longer term stewards of our clients’ assets rather than the short-term traders,” said Mr Hardy.
“As we have seen, when companies are mismanaged too much in the short term, that can lead to ESG failure, such as what we saw at some banks prior to the 2008 crisis.”
There are still many investors who associate ESG with weak financial performance, which is one reason why the first wave of socially responsible investing in the 1990s failed to gain traction. Nevertheless, things are changing.
“When I talk about this issue I often joke, when a guy stops you in the street and asks you if you want world peace or a Ferrari, you say world peace but really you want a Ferrari … but what is the point of saving a huge stash of cash for your retirement if you find yourself living in Gotham City?” said Mr Hardy. “So we should all ask ourselves, what kind of society do we want to live in?”
The release in 2005 of the United Nations Principles for Responsible Investment (PRI), which included a review of the financial performance of ESG initiatives in United States, was a game-changer as it applied to all asset classes and not just equities. People are now seeing more and more opportunities in ESG, says Joanna Crompton, portfolio manager of the Europe Behavioural Finance Team at JP Morgan Asset Management.
ESG investing, she explained, can vary from investing in a wind turbine company that clearly tracks a long-term sustainability trend, to a mining company that might be relevant in ways that are not immediately obvious.
There are many different ways to approach ESG. Her approach does not involve “negative screening”, or indiscriminately rejecting large sectors such as tobacco and mining, nor does it involve “theme investing”.
“We do not invest along one ESG theme such as water stress or low-carbon. What we do is ESG integration which means we systemically and explicitly consider ESG throughout our investment process and that is the basis of everything we do, not just ESG,” Ms Crompton said.
The “positive best in class” approach that JP Morgan Asset uses also looks for sustainability leaders within each sector. In mining, for example, Anglo American might be considered controversial but is “one of the better stocks” in its sector for managing ESG risks. It has a good record of disposing of assets that have poor environmental and social profiles.
“What we really want are those companies that are focusing on the future, she said. “We are not going to suddenly ask an oil company to stopping drilling for oil tomorrow because it is not realistic.
“What to own is an oil company such as Total (of France) which has recently brought a battery company, and has a target to reach 20% of production from low-carbon sources by 2030. We want companies that are aware that the industry is changing and want to move with that change in the industry.”
It is not enough to simply own the best ESG stocks, she said, as the asset manager is also seeking to be an active manager of clients’ capital by engaging with them to drive change through collaboration with its ESG team.
For example, a few ESG data providers think the consumer goods and food multinational Unilever looks “quite bad” on ESG issues, especially where the controversial subject of palm oil is concerned. But JP Morgan Asset is now engaging with the company, which was one of the founders of Tropical Forest Alliance 2020.
“They have a strong approach to suppliers as they will terminate supply contacts if there is a lack of due diligence,” said Ms Crompton.
Her company continues to hold Unilever shares despite negative fallout from reports of child labour and forced labour at some plantations contracted to Wilmar, the world’s biggest palm oil producer and a Unilever supplier. She pointed out that Unilever is working to amend its previous negligence in this regard.
Nevertheless, making money is still a priority for any ESG fund manager. So how can you add value with sustainable investing?
Ms Crompton offers an example. The cost of wind is expected to fall below the wholesale power price in Italy and the UK in 2020 and in France and Germany in 2023. As the cost of wind falls below the wholesale power price, utilities will have to build out their renewable exposure to gain and keep their existing market share.
The companies JP Morgan wants to invest in now are those that have exposure to renewables but do not have big legacy exposure that could result in them missing out on the shift. Iberdrola of Spain is one example of a utility on the right path, she said.