Far from an indulgent luxury that can only be afforded during times of plenty, ESG investing options have been outperforming other asset classes during the pandemic, evolving from a thematic interest to a hedging strategy.
“The Covid pandemic has shifted the importance investors attach to sustainable finance,” said Helene Li, of Hong Kong ESG advocacy group GoImpact Capital Partners, in an interview with FinanceAsia. “ESG is not just a buzzword, it has significant bearings on the world we live in."
The ongoing coronavirus pandemic has withdrawn demand for flights and travel, while effectively putting a wrench in the consumer supply chain by shutting down factories and freight routes around the world. Impact investors, already cognisant of the high environmental and social toll taken by these activities, were less affected by the disruption.
“Companies with good ESG compliance are better able to weather the storm and therefore better able to protect their market valuation,” the GoImpact cofounder observed. Now, “investors are looking at ESG not only as an investment opportunity but as a risk mitigator.”
As the pandemic has exposed vulnerabilities in traditional investing, there has been a flurry of activity in asset management firms to incorporate impact investment practices according to researchers.
“This year’s survey found more asset owners identifying return potential as a key driver for sustainability integration,” Morgan Stanley chief sustainability officer Audrey Choi said. “Accordingly, many envision a future where they will limit their allocations to managers with formalised sustainability approaches.”
78% of investors surveyed in the May 2020 poll from Morgan Stanley’s Institute for Sustainable Investing agreed that sustainable investing can be a viable method to manage risk.
“How suddenly and severely the pandemic happened has shook people up and exposed cracks in our systems, whether it be our supply chain or capital markets,” Li added.
While moral imperative and worthy social causes have been previously wielded to encourage corporations to invest along ESG guidelines, the track record of impact investors over the past few months will undoubtedly be even more convincing for holdouts.
Making up for lost time
Compared to their counterparts in Europe and North America, Asian investors and companies have been playing catch up.
Only 31 Chinese firms and asset owners signed the United Nations’ Principles for Responsible Investment to highlight sustainable investing practices, compared with 217 in France and nearly 500 in the US. “Adoption of ESG investing in Asia has been slow,” consultancy group Oliver Wyman noted in a 2018 report.
But over the first three months of 2020, a large shift took place. While assets under management (AUM) in global ESG funds dropped by 12% in the last quarter, Asian funds minus Japan reversed the trend with AUM up 21% over the same period to reach $7.7 billion, according to a March 2020 research brief by Morningstar.
Taiwanese investment vehicle Pinebridge Global ESG Quantitative Bond Fund was partially responsible for this spike; in the first quarter of 2020 the fund raked in more than $429 million. At the international level, ESG AUM peaked late last year at in excess of $960 billion.
“We anticipate that a fast-increasing number of Asian companies publishing ESG data will lead to average ESG scores across Asia catching up to those currently observed in developed markets,” noted a JK Capital group research brief.
Between the fresh drive in Asia to divert more funds into ESG investments and the rise of ESG corporate reporting across the region, Asian impact investors are making a name for themselves.
The pandemic has provided a convenient push. “A number of ESG-related transformations, such as climate change, structural shift of crude oil demand and even people’s daily habits, have accelerated as a result of the Covid-19 pandemic,” explained Jason Yu, Schroders’ Northern Asia head of multi-asset product, in a May brief.
Almost a third of investors say they lack resources to evaluate ESG options, the Morgan Stanley survey found, and the ongoing global coronavirus pandemic could be the catalyst needed to kick greater ESG research into high gear.
Li is optimistic. “It really is a collective effort and I’m pleased to say that on the part of the government and the regulators we also see a lot of momentum,” she noted.
New challenges
While the coronavirus pandemic will eventually run its course, like a glacier receding it will surely leave indelible marks on the financial landscape for years to come.
“It would be naive to think everything will go back to the way things were once the pandemic has mellowed,” GoImpact’s Li concurred.
As investors turn to ESG investing as a risk mitigation strategy, this will put pressure on companies and brokers alike to finesse their offerings. “The people who provide investment solutions need to make sure these are relevant to the investors’ risk appetite and not just another green bond or green financing,” Li said.
The green bond space is becoming quickly saturated; global green bond issuance reached a new peak of $255 billion in 2019, a roughly 50% increase from the year before according to the Climate Bond Initiative. While a sign of progress, there are other ESG financial products that merit attention as well.
The overwhelming majority of impact investors - 88% according to Morgan Stanley’s latest poll - focus on environmental themes. “Climate change, water solutions, plastic waste and the circular economy are the top environmental issues [investors] seek to address,” it found.
But the environment is only one third of the ESG equation, and investing with the goal of lowering emissions may be less effective than previously thought. Whether in Asia or North America, ESG-focused investors have very limited control over emissions at the best of times. Publicly-listed companies, not including state-owned groups, only account for between 14-32% of carbon emissions according to research by The Economist publication.
Now, with the cheap price of oil, companies have one less incentive to move towards renewable energy sources. This could be an opportune moment for companies to pivot towards the social and governance aspects of the acronym, as researchers in the field have noted.
“This [crisis] may create a new and enduring social contract between governments, regulators and the workforce,” wrote Schroders’ head of European equities Nicholette MacDonald-Brown and European equities research analyst Scott Maclennan.
This will depend whether profits still take precedents going forward, or if ESG investing becomes more than a marketing term.
