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ESG is playing an increasingly important role for the financial markets. Asia is often seen as lagging behind – but attitudes are changing, says Joep Huntjens, Head of Asian Fixed Income, NN Investment Partners. We talked to him about recent developments in Asia ESG, the drivers and potential.
AsiaFundManagers.com: How well established is ESG in Asia when compared internationally?
Joep Huntjens: Although Asia has a lot of catching up to do compared to developed markets, awareness of ESG factors has increased rapidly over the last couple of years. It is fair to say that ESG is now a well established concept among investors, regulators, listed companies and an increasing number of bond issuers in the Asian region. Issuers have started becoming aware of ESG questions and roadshow material used for issuance of new bonds typically includes ESG information nowadays – though it is true the focus is often on low hanging fruit and real behaviour change will take longer.
According to Morningstar, ESG assets in Asia ex-Japan reached the 25 billion USD mark in 2020, growing by 130% compared to 2019. An acceleration of ESG asset growth in 2021 is likely, as climate change and sustainability have become much bigger concerns for consumers and investors since the Covid-19 pandemic. An increasing number of Asian asset managers is hiring ESG personnel, index providers have launched ESG tilted indices and we have seen a sharp increase of ESG fund launches recently.
AsiaFundManagers.com: What are the drivers for the increasing importance of ESG factors for portfolios in Asia?
Joep Huntjens: There are several drivers for the increasing importance of ESG factors in management of portfolio in Asia. Most important is increasing pressure from end investors. This trend started with large institutional investors such as sovereign wealth funds, of which many have started to take ESG factors into account in their investment policy. Asian investors have always paid attention to governance risk.
A major change is that attention has been expanded to environmental and social factors. The growing awareness of sustainability issues is expected to lead to growing demand for ESG funds from retail investors, a trend we are currently clearly seeing in Europe. Due to the strong focus of younger generations on ESG issues, this is a structural trend. Pressure to include ESG factors in portfolio management decisions not only comes from end investors.
Regulators expect asset managers also to pay increasing attention to these factors. The Monetary Authority of Singapore has for instance published guidelines in December 2020 which describe how asset managers are expected to assess, monitor, mitigate and disclose environmental risks. Regulation has also led to increase disclosure of ESG information by investee companies. Listed companies in various Asian countries such as Singapore and Hong Kong are required to report ESG data annually and China and Korea are also working on compulsory ESG disclosure for listed companies. Several other stock exchanges in the Asian region have issued guidelines for ESG disclosure, but adhering to these guidelines is voluntary.
Although ESG disclosure standards in Asia are lagging compared to Europe, differ per country and is weaker for unlisted issuers of corporate bonds, the availability of ESG data is gradually improving in Asia. The increased amount of ESG information disclosed by investee companies and provided by data providers enables asset managers to better assess ESG risks and trends, which helps them to improve the risk-return profile of the portfolios they manage.
This is another driver for increasing importance of ESG factors for portfolios in Asia and one which is especially relevant in the Asian region. Major economies in Asia like China, Japan and Korea have already announced carbon neutral targets by 2050-2060 period. This is important because it sets the tone for corporate investment behaviour from traditional “dirty” industries to cleaner projects. Given that the Asian region contributes close to 50% to global carbon emission, the changes resulting from these carbon neutral commitments will be massive and can create both opportunities and downside risks which are too big to ignore for investors.
AsiaFundManagers.com: What is the relevance of the Sustainable Development Goals in Asia compared to Europe? To what extent is there potential?
Joep Huntjens: The EU made a positive and constructive contribution to the development of the 2030 Agenda. Europe is committed to implement the SDGs (Sustainable Development Goals) in all their policies and encourage EU countries in doing the same. While European countries lead globally on the SDGs, there is still increasing relevance of SDGs in Asia. Asian governments have responded proactively, moving from adoption of the 2030 Agenda and the SDGs to their implementation at the national level much faster than was the case with the Millennium Development Goals. Some countries like Singapore and Korea have taken steps to integrate the SDGs into existing national development plans, policies and legislation, while many other governments are establishing or strengthening coordination bodies or mapping institutional responsibilities. The proactive response indicates that many governments are committed to change, and some have already proven that that they are capable of transforming.
Through the financial market, we have witnessed more active supply from Asian Issuers and corresponding demand from Asian asset managers on green, social, sustainable and blue bonds. The offering circular of each issuance may offer insights about the issuer’s framework and its alignment/contribution to SDGs. In the event where it is absent, it is often the case where the issuer aligns itself to corresponding principles and guidelines provided by International Capital Markets Association (ICMA), Climate Bonds Initiative (CBI) and Asean Capital Markets Forum (ACMF). The financing objectives of the given Green, Social or Sustainability Bond Programme can often be mapped against the SDGs via a higher level mapping provided by ICMA.
As a result, the increased activity of Asian issuers in labelled bonds will lead to increased awareness of and positive contribution to SDGs. In just the month of January 2021, HSBC reported 6.6bn USD of green bond issuance, setting a monthly record. While it has been argued that disclosure from Asian labelled bond issuers may be lagging versus their global peers, it is expected that Asia issuers will eventually catch up with its DM counterparts.
AsiaFundManagers.com: How good is the quality of information and data on ESG factors for companies in different Asian countries?
Joep Huntjens: Information and data on ESG factors can come from third party ESG data providers, published & audited reports from companies or new Flows. In our in-depth proprietary ESG analysis to monitor the ESG performance of Asian bond issuers, we have observed that the data provided by third party service providers can at times be outdated or missing. The assessment outcome of the ESG performance of a company can also vary widely between third party providers and often the coverage of emerging markets companies is low.
In terms of published reports from companies, our observations are in line with the stock exchange sustainability disclosure ranking compiled by Corporate Knights and Aviva. The Stock Exchange of Thailand has consistently performed well on this ranking and Thailand companies do exhibit better disclosure standards on our scrutiny.
Most Emerging Markets (EM) Asia countries are displaying high single digit or double digits growth in disclosure and aligned with our observation that the sustainability disclosure in EM Asia corporates have been improving. The few exceptions include Japan, Korea and Indonesia where 1) disclosure has been stagnating and 2) language barrier poses additional challenges in carrying out ESG analysis for companies in these countries.
In general, with increasing disclosure of ESG Reports in Asia, the quality availability of information and data on the ESG factors will improve with time. Given that low coverage levels by third parties research providers, investment managers with the capability to track events and produce proprietary localised ESG fixed-income research are more nimble and are likely to have an edge over peers who rely solely third party research providers.
AsiaFundManagers.com: Is there any evidence that ESG strategies (in Asia) generate higher returns or reduce risk in the portfolio over the long term?
Joep Huntjens: Amidst the turmoil created by the Covid-19 crisis, what stood out was the continued shift towards sustainable or ESG investing. The pandemic prompted investors to reassess sustainability risks, a subject that they’ve been increasingly aware of in the past few years.
An analysis by the International Monetary Fund suggests that the performance of sustainable and conventional funds is comparable. The finding is broadly consistent with the market performance of Asian fixed income; for instance, JP Morgan reported that from 2013 up till September 2020, the JESG JACI index has similar annualized returns as its non-ESG counterpart JACI. The ESG version of JP Morgan’s Asian Credit Index has provided a similar historical risk-return profile as its conventional Asian Credit Index while maintaining a superior ESG profile.
The disparity between the ESG and conventional versions of the index from a sustainability point of view will likely resonate with investors who are concerned about sustainability. More importantly, the changes resulting from the upcoming transition to carbon neutral economies, impending changes to regulation, coupled with growing investor demand for sustainable solutions, are likely to change relative performance drivers going forward. Crucially, historical data shows that Asian fixed-income investors are able to significantly reduce their carbon footprints without needing to lower their expected level of returns, proving that can indeed be rewarded fairly while contributing to an important cause.
AsiaFundManagers.com: China does not score well in many ESG ratings due to the governance factor. In which markets are you investing primarily?
Joep Huntjens: From the corporate angle, our own ESG data statistic shows that most Asian countries are still lagging behind Developed Markets (DM). Corporate governance of Chinese companies is amongst the weaker ones alongside with Korea and Japan.
Although the current governance scores China are lagging, we believe that there is positive momentum driving the improvement of governance as well as other sustainability pillars in China. There is strong motivation to improve governance as China further internationalizes. We also believe that an improving governance profile on a sovereign level acts as a catalyst to accelerate the improvement in Chinese corporate governance. In 2020, the Chinese government had been vigorously stemming corruption and improving regulatory quality, setting the stage for an improved corporate governance through a very centralized approach.
The JP Morgan Asia Credit Index, which is representative of the USD Asia Credit market, currently consist of 51% Chinese issuers, 11% Indonesia, 8% South Korea, 7.9% Hong Kong and 6% India. Our investment process integrates a multitude of forward looking factors (macro, fundamental, ESG and technical analysis) to determine our country/sector allocation and issuer selection based on a risk-adjusted return expectations.
AsiaFundManagers.com: Thank you very much for the interview.
Joep Huntjens
Head of Asian Fixed Income
NN Investment Partners
Since 2010, Joep is the Head of the Asian Fixed Income team within the Global Credit Boutique and the Emerging Markets Debt Boutique of NN Investment Partners. He is responsible for Asian Credit Investments for NNIPs’ pan-Asian portfolios as well as for Global Corporate Credit porfolios. He also supervises the Credit Analyst team and is Lead Portfolio Manager for the Asian Debt Hard Currency strategy and the EM Corporate Debt strategy and Senior Porfolio Manager for the Global Investment Grade Credit strategy.
