Co-author: Kyra Ngai, Intern at AVPN
4 min read
ESG investing: Why now, and why Asia?
Climate change was once talked about as a distant threat, but the increasing frequency and intensity with which we are seeing climate-related disasters has cemented it as a worrying reality that few can ignore. In the business sector, there have been stronger efforts to combat the climate crisis through sustainable investing. Recently, we invited ESG fund experts to speak at our webinar and learned about how financial decisions are being formalized in the institution of ESG investing, which optimizes environmental, social and governance factors and outcomes. The tremendous growth of ESG funds in Asia is a testament to the keen interest that investors across the region are expressing to create impact through their investments.
Difficult terrains for newcomers
That said, Asia’s ESG investment scene is still in its infancy. “We are light years away from the standards expected by first world investors,” said Praveen Jagwani, CEO of UTI International Singapore Co. Ltd. Certainly, newcomers will face a plethora of challenges in their ESG journey. Both Jagwani and Stephani Bilo, Chief Client & Investment Solutions Officer at responsAbility, highlighted how the frameworks governing ESG investing may overwhelm stakeholders who are not familiar with them. Logistical difficulties persist as well; “It’s becoming clear that you can only do good if you have a sustainable value chain,” said Ms. Bilo.
To assist stakeholders, experts in the field must derive and implement innovative solutions. It is also important to visualize the outcomes an investor may want to achieve before formulating an investing strategy. These outcomes can be shaped by existing frameworks such as the UN Sustainable Development Goals (SDGs). Ms. Bilo explained that her firm uses the UN SDGs as guidelines to identify which portfolios to invest in. Such frameworks may also help firms decide which factors they would like to use for their own ESG criteria.
The integration of ESG expertise into the company’s operations
To devise strategies or scorecards, one must be equipped with sufficient knowledge about ESG investing. Furthermore, it is vital that these knowledge holders be involved in all facets of a company’s decision-making process. Mr. Tim Macready, Chief Investment Officer at Brightlight Investment Management, points out that it is not enough for companies to hire experts as ESG analysts who are tasked with closely monitoring the company’s investment decisions. Without anyone realizing, there may be a disconnect between the thought processes of ESG analysts and the actual happenings for the company on a daily basis.
“There’s lots of people implementing some type of responsible investment approach, but there’s a lot of dispersion in what that approach actually is,” he adds.
One way to bridge this gap would be to task portfolio managers with ESG responsibilities. This responsibility delegation would ensure that decision-makers can seamlessly transition between broader business issues and ESG matters.
The ideological barriers to ESG investing
Beyond the structural issues, some ideological factors may also be impeding the progress of ESG investing. Despite its prevalence, ESG investing is still perceived in Asia as a Western concept. Mr. Macready reminds us it is important to recognize that the concept is applicable in local contexts as well. “ESG needs to be contextualized into the context of the company and the country you’re investing in.”
Investors must stop viewing ESG considerations as a limitation on profitable investments, and understand that the ESG framework is beneficial for ensuring the long-term sustainability of investments. This lack of awareness is especially pertinent to smaller but essential entities which constitute business chains.
Everyone has a role to play
To implement all the aforementioned factors, it is important to involve a wide range of stakeholders. Mr. Jagwani stated how governments’ ambitious targets to reduce carbon emissions and other environmental issues have pushed investors to explore how their investment decisions can contribute to them. In addition, Ms. Bilo pointed out that apart from private entities, her firm has engaged with development finance institutions to bring in more capital to support specific issues such as a lack of access to clean energy, the need to ensure sustainable agriculture and resilient food supplies, etc.
Simple answers to complex questions
Environmental issues are complex. And even though ESG investing has been increasingly recognized as a key tool to address these issues, many existing factors mitigate their effectiveness. We must continue to raise awareness of these issues, and help stakeholders’ build capacity to increase their engagement with the ESG landscape. These goals call for a fundamental shift in the mindsets of private and non-private actors. They must cease viewing ESG investments as limitations on their economic prosperity, but as their long-term benefits. As Ms. Bilo pointed out, it is important to orient values underlying entrepreneurship with the moral philosophy of doing good. It is undeniable that we are living in the age of the Anthropocene, where many of the issues we face are rooted in our own actions. However, the problem has now become the solution; the best tool we have at our disposal to extricate ourselves from the complex web of issues we are entangled in might be ESG funds.
