As markets continue to apply a sustainability lens to financing, investors are increasingly aware of the importance of incorporating ESG into their investment strategies. But building a successful green portfolio is more than just about allocation, experts at the FCC said.
“We often talk about ESG in terms of research and portfolio construction, but actually, once we hold these assets, we have a really important part to play in terms of ensuring that they are delivering on the commitments and objectives they’ve set themselves in the ESG space, holding them to account and driving change,” said Claire Herbert, ESG manager at Schroders.
Yet monitoring and engagement can be cumbersome, and some investors may not have the resources to do it across their entire portfolio. This is where collaborative action comes in.
“A single investor isn’t going to be able to claim to have driven change in a certain company, but collective action where investors together are driving change towards a common goal is how we’re going to move the needle,” Herbert added.
Besides providing investors with a stronger voice, collaborative engagement is also beneficial for portfolio companies, as it provides one point of contact and an aligned set of expectations, rather than multiple – and possibly contradictory – demands.
“We’ve heard from companies that they very much welcome these engagements, because investors are coming together and having a common agenda… so companies find that much easier to act upon,” Asia Investor Group on Climate Change (AIGCC) director for investor practice, Jane Karen Ho, said.
The AIGCC encourages common action among the region’s asset owners and managers. The industry body comprises investors from 11 markets in Asia and beyond, with a combined AUM of $35.8 trillion.
From a corporate perspective, chief financial officer of Lenovo for Asia Pacific, Joey Wong, stressed that investors should remain “data-driven”, “patient” and “open-minded” when evaluating the ESG progress made by their investees.
“A lot of these efforts take time, and in the short run they require resources, be it human or financial capital; so definitely we make sure we have the right timing expectations in our ESG goals,” she explained. “[Additionally,] ESG manifests itself in many different facets across different industries, so different corporates have different ways of reaching their goals.”
Herbert added that the format of escalation should be particular to each case, rather than follow a rigid step-by-step framework.
On Schroders’ stance towards divesting from recalcitrant firms, she added: “I will say that divestment can be a solution in the most egregious cases, but [for] Schroders, we prefer to have a seat at the table to drive that change rather than simply divesting.”
Overcoming ESG challenges
Ho highlighted getting internal buy-in as the most common challenge that investors face when implementing ESG frameworks and initiatives.
“Changes at the organisational level cannot be a siloed exercise by ESG teams…. It’s on the board and management level to set the strategy and guide direction. Getting that is one of the key barriers we hear [from investors],” she said.
Additionally, she highlighted knowledge gaps, including around goal-setting best practices, available tools and regional considerations.
Herbert agreed with Ho on the importance of top-down buy-in and knowledge-sharing with peers and asset owner clients, adding that the abundance of information can make it difficult to identify relevant guidance.
Clearer and accessible ESG investment frameworks are also necessary. To this avail, AIGCC partnered with six other investor groups on The Investor Agenda. Most recently, the group formed The Investor Climate Action Plans (ICAPs) Expectations Ladder and Guidance framework oriented around investment, corporate engagement, policy advocacy and investor disclosure.
Ho further elaborated on AIGCC’s other efforts in the space, including teaching sessions, Q&As and working groups for board members, fund managers and analysts.
