ESG integration in Asia Pacific – interplay of do-well and do-good elements
Despite the long-standing debate that Environmental, Social and Governance (ESG) investment drivers are broadly categorized into two buckets:
i) investors who believe that ESG factors are key performance differentiators; and ii) investors who believe ESG investing has been widely capitalized as an effective marketing slogan, the popularity of ESG investment products remain largely driven by the fact that investors wish to see their investments performing well while matching their environmental and social values.
We see this desire to do good while benefiting from the long term risk-adjusted returns of ESG being rapidly integrated in the psyches of investors, particularly in Asia Pacific, and ESG integration can no longer be overlooked.
Integration of financially material ESG criteria can bring positive financial performance
Across APAC, we observe a greater urgency from stakeholders to accelerate the uptake of ESG investment products, as well as a higher appetite for innovation when it comes to making ESG investment commitments. We note that both institutional investors and high net-worth individuals are more prepared to consider taking up illiquid ESG investments, such as private debt. While the reasons behind this might vary (i.e. fiduciary duty, regulation, alignment of values), most of investors acknowledge that financial performance should remain a motivation.
Investors are also becoming increasingly aware of the importance of capturing the quantitative impact of assets that are currently in transition, with for example attention being placed on transition bonds that support activities that are moving towards being more sustainable and not only those that are already green. According to a 2019 study conducted by Societe Generale, the top 30% ESG rated companies would have outperformed the STOXX600 over our reference period by more than 9%. However, if investors had bought the positive-ESGmomentum companies, i.e. those that improved on the ESG rating by more than 10% YOY, they would have outperformed the STOXX600 by 23.5%, as shown below.
Key drivers of ESG integration in Asia Pacific
With these trends in mind, it is important to note that the uptake and success of ESG indices are largely dependent on 3 key factors: i) “education” and communication, ii) innovation, and iii) customization.
EDUCATION: Taking the time to explain to investors on what ESG factors are, and how these can be incorporated into their investment portfolio as well as implemented efficiently in the long term. There is also a need to educate the investors who may inherently prefer short-dated products, that ESG investments typically deliver environmental and social benefits, and potentially exceptional results, over a medium to long-term horizon. It has been observed that there is a greater ability to leverage lessons adopted from ESG products from other regions that has made the curve for educating clients and adopting these strategies much faster.
For instance, the launch of Societe Generale’s Positive Impact Notes in Asia Pacific (a product allowing our clients to invest in a structured note whilst promoting Positive Impact Finance) has achieved a strikingly high uptake rate in this region within its first quarter, a result only achievable in Europe after its first year of distribution.
INNOVATION: Our clients in Asia Pacific have also been noted to have a higher appetite for exploring a variety of innovative and differentiated investment products and ESG solutions. These range from ESG indices, fund-linked products and socially responsible cash deposits, for example. However, there is still a data challenge, as providing proper ESG indexing is dependent on reliable and comprehensive reporting of ESG data by companies that is widely standardized.
CUSTOMISATION: There is no one-size-fits-all ESG strategy. Knowing the market and available offers combined with a three-dimensional approach to customization is recommended:
• Financial customisation: local ESG specificities and priorities, for example: prioritizing regional stocks and assets
• ESG customisation: local ESG investment styles for instance, we see institutional clients in Japan focus less on ESG exclusion and tilt the weights to favour ESG leaders in their portfolios
• Local regulations - customisation to local ESG rules.
In conclusion, with rapid developments of ESG drivers leading to greater stakeholder demand for improved sustainability performance, integrating ESG into investment products has become more important than before. Measuring ESG can mean the development of a multi-dimensional metric - one that incorporates quality data, investor preferences and can be easily customized to local ESG rules of the region. As a bank which focuses on sustainability, our ambition is for ESG financial offerings to grow in tandem with market and investor demand in Asia Pacific in the years to come.