Back in the 1960s, some investors were already paying heed to be more socially responsible. They started paying attention to the harm certain business activities had on the environment; others began to eschew tobacco companies given how the harm from cigarettes had been proven. Or, they avoided arms manufacturers.
What was previously called corporate social responsibility in an earlier era has evolved into the environmental, social and governance (ESG) standards as popularly known today.
As the years go by, the list of concerns and issues on the agendas have gradually evolved, although the core goal remains the same: have a positive impact on the society at large and not be solely obsessed with making returns on capital.
With the on-going pandemic, there’s a heightened consciousness on the part of the wider community to pay more attention to ESG, and one way the investors have been doing so is by demonstrating their healthy appetite in this area.
According to Refinitiv, which tracks industry data, Asia-Pacific borrowers more than doubled issuance of bonds tied to ESG themes to a record US$69 billion this year, as they sought to tap increasing investor appetite for sustainable asset classes.
From the perspective of UOB Asset Management (UOBAM), this statistic is an indication of how far ESG has come since 2012, when there was limited attention to ESG investing market in Asia outside of Japan. Investors had to look to Europe, where there is better awareness and such investing themes were more prevalent.
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Along with changing attitudes and growing awareness of ESG since the onset of the pandemic, market dynamics have changed as well.
“Conversations are now no longer simply about financial returns and performance when making investment decisions. Investors see that sustainability is no longer viewed as a ‘good-to-have’ aspect or a tertiary consideration but is now often actively integrated into investment decisions and business models. ESG Investing will eventually become the new normal in Asia,” according to UOBAM Sustainability Office.
If current trends are to go by, more consumers will call on companies to embrace more ESG-friendly practices, governments will implement more ESG-related rules and regulations. And more important and directly relevant to the financial industry, the whole ecosystem of investors and issuers will keep on growing.
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“We believe that top-down commitments have driven the ‘wall of money’ in Asia towards embracing ESG and sustainability. The push from governments and regulators has catalysed the adoption of sustainability practices by many Asian companies, that have realised that ESG investing also drives long term financial performance while simultaneously creating a positive impact on the environment and society,” UOBAM Sustainability Office adds.
However, the ESG journey will not be entirely a smooth one. Given how investing according to ESG themes is still a relatively nascent part of the wider financial services system, there are issues that will need addressing.
Firstly, ESG ratings – from which investors need to use to gauge – can be difficult to interpret, as rating providers have differing methodologies in assessing companies based on different data points and the quality in assessment. The final ratings themselves are a function of ESG factors including sub-variables encompassing broad areas in scope and measurement.
Secondly, there is a gap in data coverage for emerging and frontier markets, especially in Asia, where this trend is still relatively new. Many companies do not have the requisite resources to fully provide what the ratings providers require of them.
Thirdly, many investors still have the misconception that compromises have to be made when investing in ESG products. But this is not entirely true.
Research from organisations such as CFA Institute have shown that strong ESG companies achieve better financial performance compared to those who place less or no emphasis on ESG factors.
“The positive relationship between ESG and performance supports the notion that businesses that adopt such practices are more resilient, able to navigate risks well and are better prepared to meet future challenges,” says UOBAM Sustainability Office.
“Far from compromising on returns, we believe ESG investing allows the investor to invest for both profit and purpose. Investors have started to take notice, with fund inflows into ESG funds in Asia in 2020 growing nearly 20 times compared to the previous year from US$850 million to US$16.9 billion,” it adds.
To this end, UOBAM has developed its own proprietary ESG rating and assessment methodology that incorporate the use of artificial intelligence (AI) and machine learning models to gather, sieve, analyse and process ESG data.
Should data not be readily available, UOBAM is able to leverage its strong regional footprint and local investment teams to conduct engagements and detailed research on the ground to gather better insights into the ESG performance of companies it invests or looks to invest in.
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