30 Jun 2021

ESG Strategy for Asia’s Next-Generation Leaders

Regional investors should meanwhile be wary of ESG-themed products that are too narrow in scope.

Sustainability is no longer just a matter of reputation risk, but has considerable implication for banks' and companies' bottom lines. PHOTO: PEXELS

INTEGRATING environmental, social and governance (ESG) considerations into investments used to be just a nice-to-have - or even a sacrifice, in the view of some. These days, however, investors' conversations around ESG are increasingly moving from "why" to a "why not".

Even in Asia, where assets' ESG ratings tend to be lower than that in more developed regions, consumers are increasingly aware and raising their expectations when it comes to sustainability issues. Corporates, by extension, are increasingly being viewed through their role in society as a force for good.

According to MSCI, the proportion of laggard companies - referring to those with B and CCC ratings - stands at 13.5 per cent in Asia, compared to 5.5 per cent in the West. That said, Asia is on the cusp of a significant wealth transfer, with an estimated US$15 trillion expected to change hands in the region by 2030, showed a survey by Asian Private Banker in 2019.

"As those in the next generation - who tend to be more sustainability-conscious compared to their predecessors - take over the reins of the family business, we can expect them to place stronger emphasis on ESG-related concerns and steer the business accordingly," Joseph Poon, group head of DBS Private Bank, told The Business Times.

Most Asian countries are sitting at a different stage of the "ESG life-cycle", not only in comparison to more developed nations in Europe and North America, but also against some of their counterparts in the region, he said.

"While it is easy to criticise the use of coal for cooking, a trade-off between survival and environmental outcomes is necessary for some rural communities in Asia where there are no other available or affordable alternatives," he added.

If not me, then who?

Still, clients at DBS who are from the second generation in a family business are increasingly looking at how their investment decisions could shape the world, asking questions such as "If not now, then when?" and "If not me, then who?"

Part of this introspection could be attributed to the Covid-19 pandemic. Financial market gyrations and pandemic-induced volatility have led investors to seek well-diversified portfolios positioned for the long term, where risks are managed not only at the portfolio level, but also for each of the underlying investments.

The pandemic has also prompted many to slow down and consider issues they may have previously neglected amid the hustle and bustle of life, such as one's role and responsibility in society.

"Over the past year, we've seen clients come forward with intentions to help communities in their home countries, or express interest in funding or mentoring social enterprises or setting up philanthropic trusts," Mr Poon said.

If investors and consumers incorporate ESG into the heart of their investment philosophy, they can create a "multiplier effect" by encouraging companies to integrate ESG considerations into how they run their businesses, and how they do right not only by their shareholders, but all their stakeholders as well.

ESG also helps with risk management. Studies have found that companies with higher ESG ratings tend to have stronger financials and thus, potential for stronger long-term outperformance.

Figures from a Fidelity report in 2020 showed that stocks at the top of the fund house's ESG rating scale outperformed those with weaker ratings in every month from January to September last year, with the exception of April.

At a separate briefing by the Banking for Impact consortium last week, sustainability experts at various financial institutions which are part of this new alliance, including DBS, stressed that sustainability is no longer just a matter of reputation risk, but has considerable implication for banks' and companies' bottom lines.

ESG funds: Unsustainable?

But Mr Poon cautioned against selecting Asian assets solely on their ESG ratings, as that may not be representative of their long-term potential.

"ESG is a journey, and these assets too need time to improve their ratings," he said.

Marc Lansonneur, head of managed solutions, balance sheet products and investment governance at DBS Wealth urged investors not to view ESG investing as a "product type", and rather to integrate ESG considerations as a philosophy into their investing decisions.

"It is a means to screen the quality of an investment over and above traditional financial criteria, such that the investment is more deeply assessed to discern its ESG quality," he said.

The most common ESG-related investments in Asia today come in the form of ESG-thematic products such as thematic mutual funds and exchange-traded funds. But Mr Lansonneur cautioned against thematic products that are overly niche or narrow in scope.

"These may not provide adequate opportunities for active management against a relevant benchmark, given there may only be a few companies within its scope. Furthermore, some are driven by esoteric themes that are currently hot but may not be sustainable investment ideas for the long term," he said.

He suggested maintaining ESG-thematic investments as a satellite exposure, at no more than 10 per cent of one's portfolio.

Instead, investors can look out for products with broader themes which have the flexibility to adapt to changes in investment opportunities over time. Funds that integrate ESG criteria into their investment process would more closely align with the approach at DBS Private Bank, Mr Lansonneur added.

"In terms of ESG-integrated investments, we would encourage investors to apply this approach across all their holdings - to relook all their holdings through an ESG lens and replace poorly rated holdings for better-rated alternatives where possible."

This article was written by Kelly Ng and first published in The Business Times on 7 Jul 2021.