Stock Exchanges Globally Engaging in ESG Issues
Asia Asset Management
The Association for Sustainable & Responsible Investment in Asia (ASrIA) advocates that sustainable economic development is the only viable option for Asia, with SRI (sustainable and responsible investment) as a key market mechanism towards achieving this goal. ASrIA also points out that with growth of SRI in Europe and the US, SRI activity is growing in Asia and that despite total money under management in Asia of less than US$2.5 billion, this figure is increasing rapidly as SRI becomes incorporated into investment strategies around the region.
"I would agree with the growing trends as many of our competitors have noted newly launched sustainability themed funds growing to over US$500 million less than a year from launch with proper marketing behind the effort," observes Christy McKee, client portfolio manager for SRI capabilities at Aviva Investors.
Aviva Investors dedicated SRI team has been managing SRI funds since 2000 and has one of the widest ranges of funds available in Europe including UK, European and global equities, property, infrastructure, cash, corporate bonds and long/short equity. As at January 2010, the company managed £4.5 billion (US$7.12 billion) in SRI, largely representing European pension and endowment investments.
"We believe that those companies conducting their business in a sustainable and responsible manner are more likely to succeed over time. As a result, the company treats SRI not only as an asset class but as a key strategic focus that will drive the firm's future success from a people, process and performance perspective. Effective screening, thematic analysis, portfolio construction and engagement and proxy voting are an important part of the SRI process," says Ms McKee, citing the main objective of Aviva's SRI team as developing the capacity to deliver top-performing funds by explicitly integrating social, environmental and corporate governance issues into the investment process.
Apart from Australia, Japan is said to have the most developed SRI market. Although the first SRI-related fund was launched in Japan less than three years ago, there is now over US$1 billion in SRI strategies.
In Japan, investor-led movements, such as the Ministry of the Environment's committee to consider a Japanese version of principles of environmental actions, based on the United Nations Principles for Responsible Investment (PRI) have been launched. Thus, the environmental aspect of growth strategy in the Japanese economy is gaining in importance and this is being increasingly recognised by society as a whole.
Since launching its first SRI fund in 1999, Nikko Asset Management has developed a wide range of SRI funds and has, according to Akiko Tsuboi, a spokesperson for the company, become a pioneer in the field. Nikko AM currently has assets under management of approximately ¥9.4 trillion (US$111 billion), of which approximately ¥270 billion is in SRI funds. As a signatory to PRI since October 2007, the company has co-chaired a network of PRI signatories in Japan and incorporated ESG (environment, social, governance) perspectives into its decision-making processes, also establishing close and trusting business relationships with the World Bank.
Nikko AM is also expanding its SRI initiatives to cover ETFs and currently has 14 ETFs whose combined assets under management total approximately ¥500 billion. In April 2009, Nikko AM launched the Listed Index Fund FTSE Japan Green Chip 35, Japan's first ETF linked to environment-related stocks, which obtained a listing on the Tokyo Stock Exchange.
"Environmental problems are so serious that they affect our very survival and projects to solve them require huge funds and vast expertise. To that end, we believe financial institutions should play an important role in protecting the global environment through SRI funds. When it comes to SRI funds, they have up to now focused on equity investment, in which financiers invest in environment-friendly companies, but within Japan's equity investment-centred SRI fund environment, Nikko AM has expanded its line-up of funds targeting bonds, thus, broadening the role of SRI funds in society," comments Ms Akiko.
After Japan, Hong Kong is the most developed SRI market. Again, according to ASrIA, the recent launch of global SRI funds in Hong Kong by some of the large international SRI players is an indication that fund managers are starting to recognise the opportunity for SRI in Asia.
"SRI is becoming a major trend in Asia. As Asian countries are expected to achieve substantial economic growth in the future, we expect that there will be even more opportunities for SRI. In the future, even more investors are likely to take an interest in SRI. We also believe that social demand for SRI funds is growing," comments Ms Akiko, adding that with 60% of the world's population concentrated in the region, Asia is expected to become the driver for growth of the world economy. "It is anticipated that infrastructure development will progress with economic growth and that Asians will develop a keener awareness of energy, logistics and other business areas."
Ms McKee is more critical: "Outside Hong Kong and Japan, there are few SRI funds available and while there are limited funds for sale in Singapore and Taiwan, limited marketing means that awareness is low. In Malaysia, there are a number of Islamic funds based on Shariah finance principles, but there is an obvious lack of integrated and thematic options," she observes.
"My perception is that Asian investors are more focused on the fund management enhancements that can be had from where ESG factors have a material impact on the ability of companies to generate long-term earnings. In some Western countries such as the Nordics, there is a strong focus on negative screening and the screening out of stocks that do not meet certain ethical criteria. Asian investors, particularly in Japan and Australia, are looking at how companies manage the extra-financial aspects of their business because it can provide a proxy to management quality and business sustainability, which has a material impact on shareholder value. They are using an integrated approach to SRI investing, where these factors work to differentiate between proactive and reactive companies in order to identify potential winners and losers," she adds.
At Aviva Investors, SRI stock selection is based on a combination of SRI and quantitative financial analysis which works to identify companies that meet the company's environmental, social and governance criteria. Analysis is also based on identification of the impact on valuations of ESG themes such as impending legislation and climate change impacts. The company also uses sustainability ratings determined by its proprietary sustainability matrix to determine its investible universe for SRI funds. The approach is designed to identify best in class companies, both in terms of product sustainability and ESG risk management and to deliver consistent outperformance on a one to three year horizon.
Aviva Investors has also been leading the PRI collaborative engagement proposal for more sustainable stock exchanges. Paul Abberley, CEO Aviva Investors London, accompanied by the company's head of sustainability research and engagement, spoke at the recent Global Investment Forum held in Xiamen, China in September as part of a discussion on how stock exchanges and key stakeholders can improve ESG disclosure and performance of listed companies, either through voluntary exchange-led initiatives or regulation.
"The reason why we have focused on stock market listing codes is that they have significant influence over how successfully large numbers of companies govern themselves. Updating these codes is therefore a very serious undertaking so we are pleased to be working with the offices of the UN. While it is possible to overstate the effectiveness of listing codes, we believe that this initiative has significant potential to make capital markets more sustainable," explains Ms McKee. "Markets are driven by information. If companies do not provide an assessment of the wider environmental, social or governance risks and opportunities associated with those numbers, how can the market assess the sustainability of that growth? We are merely asking for the support of listing authorities to make corporate responsibility reporting a 'comply or explain' requirement and for this report or explanation in whatever form it takes to be put to shareholder approval at the AGM," she adds.
David St Maur Sheil, joint executive and co-founder of ASrIA, described one of the outcomes of the Xiamen meeting as the recognition that stock exchanges globally are starting to engage in these issues and that Asian stock exchanges are leading the way. Mr St Maur Sheil also highlighted ASrIA's involvement in leading the initiative on behalf of its members to take part in public consultations on the standards the Bursa Malaysia and Singapore Stock Exchange should be adopting in terms of ESG requirements or advice to listing companies.
"What we can see is that when we first started ASrIA many years ago, it was the recognition that investors can have a great influence on the corporates through their investments or engaging with them on ESG issues. Stock exchanges also, as regulating and evaluating bodies, can have a very strong influence as well", says Mr St Maur Sheil. "But we're not just talking about the assessment of corporates in the ESG index but also the assessment of stock exchanges themselves. Stock exchanges, of course, have a role of regulating and evaluating markets and as investing bodies want to increase their own business. With companies now listing on several stock exchanges around the regions, investors will choose which stock exchange they're going to invest in. As stock exchanges start to look at these issues, it will become very important that exchanges in the region and globally cooperate together in terms of standardisation," he concludes.
This article first appeared in Asia Asset Management on 4 october 2010. For more details, please visit www.asiaasset.com