Top 100 pension funds progress ESG strategies

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A study by the Economist newspaper’s ‘Intelligence Unit’ on asset owners’ priorities in the ESG space has shown that, within the largest cohort of the top 100 asset owners, in Asia, there has been a significant increase in awareness of ESG issues over the past few years.

The Asian-based big global investors, perhaps surprisingly, are the most influential in the global world. Including Australia’s and New Zealand’s sovereign wealth funds and other big super and insurance funds, they make up three of the top five and half of the top 20 globally.

The main findings of the report include:

  • There has been a significant change in the awareness, uptake and impact of ESG in Asia over the past three to five years. This has been driven by: uptake by large asset owners such as Japan’s Government Pension Investment Fund (GPIF) and the Thai Government Pension Fund, which are not only transforming their own approach but proselytising among other investors in the region; the policies of national and multilateral development banks; and regulatory action by governments and exchanges.
  • Asset owners are motivated by an increasing recognition that their investment decisions have material consequences for their environment and the lives of their beneficiaries. What’s more, there is growing awareness that integrating values or ethical considerations into investment approaches does not necessarily result in a negative impact on financial returns or performance. Rather, ESG is an integral component of prudent risk management.
  • In terms of financial return, “governance” seems to be the most important ESG factor for most AOs, given its demonstrable link to optimising risk-adjusted returns. Capital allocation, in social and environmental themes, tends to be made within a framework of first identifying companies or assets that fit a good-governance profile and fulfil a returns-based role within portfolios. China is an exception, where a government focus on environmental issues has pushed this factor to the fore.
  • As in other regions, ESG investing began with a negative screening approach. While the method is still used, the dominant ESG approaches are now engagement and, in particular, integration. Although commonly seen as late adopters, Asian AOs are applying this throughout their portfolios, rather than asset class by asset class.
  • While progress is accelerating, challenges remain. Interviewees cited concerns about thin and poor-quality data preventing informed investment decisions; a fragmentary regulatory environment across the region, and a dragging perception in the broader market that ESG was about values (or ethics) rather than financial value (or returns). However, all participants agreed that these issues were being addressed and progress continues to be made.

– G.B.

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