Asia is a fast follower in several things, and investing in environmental, social and governance (ESG) themes will be no exception, says David Smith, senior investment director, Asian equities at the UK-based investment firm abrdn.
“Asia has accelerated from the early-2000s and is now a leader in several areas,” says Smith in an interview with The Edge Singapore. He first based himself out of Singapore in 2006, when the context was “slightly different”. For one, investor engagement with corporations was relatively more nascent. “[Back then,] you would be the first person to have that conversation, but that has certainly changed a lot.”
Before joining abrdn in 2011, Smith worked for advisory firm Institutional Shareholder Services (ISS) as head of Asia (ex-Japan) research. The Briton recalls memories of the Asian Financial Crisis, which had caused regional markets to tank, economies to shrink and banks to go under, were still fresh when he relocated here.
“I think in the aftermath of any significant event, whether it’s the global financial crisis or Covid-19, there’s always a period of reflection [and] potentially a focus on regulatory action,” says Smith. “We’re still seeing that introspection around the role of finance in allocating capital, and an awareness that finance doesn’t operate in a bubble and isolation… How capital is allocated to one industry will impact other parts of the industry and other stakeholders.”
The “parabolic” rise of interest in ESG in 2020 tapered off slightly in 2021 and 2022, says Smith. “That interest has shifted to: ‘Prove to me that you’re doing what you’re doing’ and ‘Show me the evidence’. You’re seeing healthy scepticism, which is entirely appropriate.”
Can Asia reach its goals?
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At abrdn, Smith supports a team of more than 40 analysts and equity fund management professionals across Asia. He is also the manager of the Asian Sustainable Development Equity Fund, which launched in August 2020. This actively-managed fund invests in companies with a minimum of 20% of their revenue, profit, capital or operating expenditure or research and development linked to the United Nations’ Sustainable Development Goals (SDGs).
The 17 goals, which include ending hunger, achieving gender equality and taking urgent action to halt climate change, were set up by the UN General Assembly in 2015 and are intended to be achieved by 2030. To Smith’s knowledge, abrdn’s fund is Asia’s only listed equity SDG fund.
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However, a UN report from March 2022 revealed that none of the 17 goals is on track to meet the 2030 target — a mere seven years away. “Asia won’t achieve the SDGs until 2065. If you think about what we’re trying to do, particularly about education for children, we’re going to be 35 years late — they’ll be adults by the time they’re achieved.”
The fund invests at least 90% in equities and equity-related securities of companies based in Asia-Pacific countries excluding Japan. In line with the UN Global Compact, the fund excludes companies involved in tobacco manufacturing, thermal coal, gambling, oil and gas, carbon emissions and weapons.
The fund will also invest up to 20% in so-called “SDG leaders”. These companies are considered to be integral to the supply chain for progressing towards the UN’s SDGs but do not currently meet the 20% materiality requirement, according to abrdn.
As of March 31, the fund’s top holding was Taiwan-listed Taiwan Semiconductor Manufacturing Co (9%).
“The semiconductor space has had a maybe a more challenging recent past, particularly coming out of Covid-19,” says Smith. “But I [am] certainly more optimistic for the recovery of semiconductor demand into the year’s second half.”
The other top holdings are Hong Kong-listed insurer AIA Group (6.1%), Australia-listed biotech giant CSL (4.2%), India-listed Housing Development Finance Corp (3.5%) and Nasdaq-listed semiconductor supplier ASML (3%), India’s ICICI Bank (2.8%), South Korean chemicals company LG Chem (2.6%), Australian industrial property group Goodman Group (2.6%), Shenzhen-listed lithium-ion battery manufacturer Contemporary Amperex Technology Co (2.6%) and the Power Grid Corp of India (2.6%).
The fund has a bigger allocation to small caps relative to the large caps, which has thus far proven positive for the fund’s performance, says Smith. The fund size is US$44.3 million ($59.26 million) as of May 12.
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By sector, 24.2% of the fund’s 52 holdings are in information technology, followed by financials (21.3%), healthcare (14.3%), industrial (13.4%) and real estate (9.4%) as at end-March. Smith notes a general bias of some ESG funds to be overweight on technology companies and underweight on financial services, “particularly if they’re tilting towards lower emissions”.
However, this has not played out well with rising rates. “ESG funds have bounced around in a falling interest rate environment,” says Smith. “We want to construct a portfolio that performs well regardless of the interest rate environment. We don’t want to rely on declining interest rates to drive performance.”
ESG performance
The fund aims to outperform the MSCI AC Asia Pacific ex-Japan Index (US dollar) benchmark before charges, which may require more time.
Launched nearly a year after the fund’s inception, the A Acc Singapore dollar-hedged share class has returned a loss of 16.45% since its launch in July 2021, with fund charges applied. The same share class may have fallen 4.78% and 4.80% over the past one and three months, respectively, but it has gained 5.71% over the past six months.
In comparison, the MSCI benchmark has returned a shallower loss of 13.57% since July 2021 while gaining 2.7%, 3.52% and 15.54% over the past one, three and six months, respectively.
What is attractive about the fund’s SDG focus is that it presents a “nicely diversified approach”, says Smith. “If you are just investing in renewables, for example, then you’re very beholden to one subset; your performance and investment opportunities depend greatly on this sector.”
Instead, an SDG approach allows Smith to move allocation across different sectors. “[During] the rising interest rate environment that we saw just last year, we were able to increase allocation to banks, which were potentially a beneficiary of rising interest rates. That’s something that we certainly have seen.”
The sustainable investment approach by abrdn is very much focused on quality and long-term investing, says Smith. “The longer your perspective, the more important ESG issues are. If you’re looking to trade in and out in a few weeks, then some of these issues may not be front-of-mind, but as a long-term owner, this is very important for us.”
The fund may invest 30% of its net assets in Mainland China equities and equity-related securities. Due to regulatory requirements, however, only up to 20% of its net assets may be invested directly through the Qualified Foreign Investor regime, the Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect programmes or by any other means.
Across geographies, the fund has 27.9% of its holdings in China as of March 31, followed by India (17.2%), Taiwan (10.9%) and Hong Kong (9.3%).
Smith and his team are positive on China chiefly for its current counter-cyclical monetary policy, compared to the tightening seen across the rest of the world. “We can debate whether we’re coming to the end of that [tightening] cycle, but China is generally loosening and easing market conditions. It will potentially be a bumpy year, [but] we’re positive long term on the structural development and the quality of companies in China, and certainly positive on tailwinds the Chinese economy has at the moment.”
