There is a huge gap between talk and action concerning environmental, social and corporate governance (ESG) principles, according to State Street.
Owners and managers responsible for approximately $65trn (£51.7trn, €61trn) in global assets are interested in implementing an ESG framework in their process, but only $25trn of that AUM is managed according to ESG, according to Maiuri.
Of the $25trn, Asia-Pacific represents less than 3% and most of those assets are in Asia’s developed markets — Australia, Japan, and New Zealand.
After excluding these countries, ESG assets in Asia ex-Japan amount to 0.2% of the total, or $50bn.
Does ESG boost returns?
Traditionally, the biggest barrier to ESG adoption has been the perception that ESG-related investments don’t perform as well as those without the ESG filter. But this perception has been receding, according to Maiuri.
“People don’t believe that anymore,” he said. “It’s really about a short- versus long-term horizon. Beyond [5 years] ESG can be proven to be performant [capable of high performance] and the longer your horizon the more performant it is.”
While some academic studies support this thesis, not all do. Therefore, more work remains to be done to convince investors. In a recent State Street ESG study, 72% of survey respondents in Asia-Pacific said further evidence of fund outperformance would be useful in driving ESG integration.
Other factors cited by more than half of respondents in APAC were greater transparency in ESG reporting; further academic research showing positive contribution of ESG to performance; and greater client demand.
“The single biggest barrier is the lack of standards in data,” said Maiuri. While there are several data providers who evaluate companies on ESG criteria, their evaluations often differ, as they use different methods of collecting and analysing data.
Robust ESG data reporting standards would improve research on performance attribution to ESG factors. It would also make investment decisions easier for those asset managers who want to implement ESG.
“On the institutional side, the most impactful thing that could help progress the ESG mandate, [would be to] prove that you can be performing, have the track record,” said Maiuri.
“There’s a herd mentality on the buy side, especially in the institutional space,” he said. “If people prove that it’s working, then everyone will jump in.”
Regulatory help
The change has to be driven by both regulators and institutional asset owners, said Maiuri. While only regulators can effectively mandate creation of reporting standards, institutional investors should be demanding those regulatory initiatives.
“When big pension plans are asking for it, the industry follows,” he said.
Institutional investors have been driving ESG integration. Partly because many naturally have a long-term investment horizon, and also because they have a louder voice.
While Europe, Canada, Australia and the US have been at the forefront, Asia has a long way to catch up
Two of the region’s large pension plans, Korea’s National Pension Service and Japan’s Government Pension Investment Fund, have made significant allocations to ESG strategies. Taiwan’s Bureau of Labour Funds is planning to implement a passive ESG investment strategy this year.
These three countries, as well as Hong Kong and Malaysia, have implemented shareholder stewardship codes to promote responsible investing.
While the benefits of incorporating ESG in investment strategies gain understanding and acceptance, its implementation requires changing the incentives model, according to Maiuri.
“It can’t be one year versus a benchmark,” he said. “You need to set up incentives around a long-term view.”
