The rise of responsible investing in Asia Pacific - BNP Paribas CIB
Monday 11 November 2019

The most exciting developments are taking place in Asia, which is playing a game of fast catch-up.

This article originally appeared in the Financial Times under the title "Responsible investing: Asia plays catchup with Europe and US".

In a room in the United States this summer, a paragraph of text was changed that heralded a remarkable shift.

The Business Roundtable, an influential group which represents the chief executives of 181 of America's largest companies, amended its two decade-old declaration that "corporations exist principally to serve their shareholders".

Instead, the Roundtable said: "While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders" — customers, employees, suppliers, communities and — last in the list — shareholders. The new wording tore up the hitherto dominant "shareholder first" doctrine and attests to changing views on how companies should be run and, by extension, how investors should deploy capital responsibly.

Once the preserve of specialised fund managers or charity investors, responsible investing has lost its 'tree-hugger' image. Explicit consideration of environmental, social and governance (ESG) issues has taken centre stage for asset managers as a key risk management tool.

"Over the last five to 10 years we have moved pretty far in understanding sustainability in global capital markets," says David Blood, co-founder and senior partner at Generation Investment Management, a $23bn sustainability-focused fund company. "The business case is very clear and supported by academic research."

Jonathan Bailey, head of ESG investing at Neuberger Berman, the $333bn US group, says consideration of subjects such as climate change and board governance are percolating throughout the fund industry. There is an "understanding ESG is not just happening 'over there'", he says, in reference to specialist stewardship teams.

The goals of the Paris climate agreement, which aims to limit global warming to well below two-degrees Celsius, Mr Bailey adds, are now well known among the group's portfolio managers and they are now considering other related issues.

Those include how industries beyond the energy sector contribute and will be affected by climate change, such as cruise ships.

Mr Bailey says these are emitters that also risk becoming victims of climate change should they be affected by extreme weather — becoming a literal example of a stranded asset.

"We're trying to drive not just the simple stuff but those second and third order implications," he says.

Cindy Rose, head of responsible capitalism at Majedie Asset Management, an £11bn London-based asset manager says "we are on a track where climate becomes something everyone talks about".

Some fund management bosses are putting their money where their mouths are. Asset managers including Neuberger Berman and the C$327bn ($245bn) Caisse de Dépôt et Placement du Québec, which manages the assets of about 40 Canadian pension funds and insurance plans, are among those where ESG considerations are used to determine bonuses of investment staff.

CDPQ, which is curtailing its exposure to companies involved in Canadian oil sands and increasing investment in low-carbon areas such as renewable energy, sets carbon budgets for investment teams.

Its investment professionals are penalised if they fall short: those who miss the target would lose up to 35% of their bonus.

However, this global push masks regional disparities. European managers are usually regarded as being out in front on ESG issues, with the US lagging somewhat. "Europe is definitely ahead," says Lisa Beauvilain, head of sustainability and ESG at Impax Asset Management.

Yet there are signs of real progress in the rest of the world, she adds, such as the San Francisco-based Sustainability Accounting Standards Board. It has created a template it describes as akin to accounting standards through which companies can report on sustainability issues such as how they use energy and manage the safety of employees.

The standards have been adopted by the likes of General Motors, Nike and Merck.

"The SASB has been a very good framework," Ms Beauvilain says. "It's a first step However, government policy has been less supportive of integrating ESG principles into the corporate sphere.

The US Congress spurned an attempt this year to introduce legislation that could require companies to report more ESG-related information.

That could potentially put it at odds with Europe, where policymakers are looking to standardise approaches across the region.

Yet for the most exciting developments look to Asia, which is playing a game of fast catch-up.

In part, the shift is down to pragmatism: companies and policymakers realise they cannot fall out of step with global peers if they are to attract international capital.

Yet many elements of responsible investing, such as the need to improve environmental standards in China, resonate.

Companies stand to benefit if they behave well behind closed doors and disclose this publicly, says Gabriel Wilson-Otto, head of stewardship for Asia Pacific at BNP Paribas Asset Management. "If we can't identify good [companies] in a sector we can't price them," he says. "Then we apply a discount."

Businesses in Asia have also made progress on establishing investor relations teams, says Ms Beauvilain. However, there is a long way to go, with executive pay one glaring absence, she adds. "Remuneration in Asia is so opaque and usually not on the ballot."

In Japan the decision taken by the Y159tn ($1.5tn) Government Pension Investment Fund two years ago to begin tracking ESG indices is seen as marking a decisive shift, which prompted others in the country to consider responsible investment.

However, Mr Bailey says corporate pension plans in Japan lag behind their public counterparts in this regard. When it comes to China the feeling is that things are going in the right direction albeit it with some serious problems.

Asia's largest economy wants ESG reporting for publicly traded companies to become mandatory in 2020 although there is a lack of clarity on how this will look in practice.

China does not yet have a stewardship code but it did change its corporate governance code last year.

The revision highlighted a particular challenge at Chinese companies: the code included a reference to party committees — senior workers loyal to the Communist party — emphasising the link between business and state.

The precise role of these committees is highly opaque. Mr Wilson-Otto says they may not be inconsistent with some forms of ESG oversight, such as scrutiny of environmental compliance and focus on efficiency.

However, he adds: "My concern is you are institutionalising control over the [company] in excess of the economic control," drawing a parallel with dual class share structures.

"It is the reality of doing business in the market," he says. "These are the structures that exist."

© The Financial Times Limited 2018. All Rights Reserved
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