Europe may be where ESG investing first became mandated, but it is now mainstream in Asia Pacific. This is good news. Accounting for environment, social and governance factors in investment portfolios is both healthy for its own sake and helps active fund managers find new ways to add value.
But turning ESG mandates into value-adding investing processes assumes that managers have access to the data that defines the ESG industry. The European experience shows this is difficult. In Asia the complexity is all the greater because the region’s markets are so varied – in both availability and quality of data, as well as the rules around what must be disclosed and reported.
Leading asset managers and service providers say ESG is about a balance between being as consistent as possible to make the most of data, while being flexible about how the data is obtained and integrated.
“Data is key for investment managers,” said Marion O’Donnell, director of sustainable investing at Fidelity International in Singapore. “We see big improvements in Asia, but there is still some way to go.”
Hardik Shah, ESG practice lead at GMO in Singapore, says the region’s variation of regulations, maturity and market practices create challenges for global fund managers. He says the starting point for ESG data is regulations to compel corporate disclosures, usually at the level of the local stock exchange.
“We need consistent disclosure from corporates, but even Hong Kong and Singapore regulations are not the same,” he said. Emerging markets and other advanced markets such as Korea and Japan are even more different. “This is something the industry needs to work on if we are to improve the usefulness of ESG information in the investment process.”
The challenge is the same for asset owners that want to invest their own assets sustainably or provide mandates to their third-party fund managers.
Liza Jansen, part of the insurance investment team at Prudential Corporation Asia, says some local markets simply lack ESG data mandates. “We have to rely on company engagement, which means there is no consistency, and so we can’t report it.”
As a result, asset owners must accept some level of complexity in how they approach sustainable investing. Some markets are not broad enough or liquid enough to provide substitutes to investing in key companies. “Our ESG policy can’t be one-size-fits-all,” she said.
Sifting through the data
Amid these challenges, however, there are good reasons for optimism about helping ESG investing go mainstream in Asia Pacific.
Firstly, although regulators in most markets are still figuring out what to require of companies, Asia is home to some of the world’s largest and most sophisticated institutional investors. They are driving ESG investing and pushing for change. Many companies want to be more transparent, even if they don’t know what information to disclose, what should be considered material, or what international standard to follow.
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Secondly, the financial services industry is working to support asset managers with the means to make better sense of data.
“Data vendors vary in their methodology and often do not correlate to one another,” said Konstantina Founta, head of risk analytics for Asia Pacific at State Street in Singapore. “There is no single source of truth.”
State Street reviews more than 50 global data vendors in the ESG world and has distilled this down to six that it recommends. It validates their data and the consistency of their analytics. It helps asset managers and asset owners access a comprehensive but targeted suite of vendors covering the front office and investment management process, the middle office and risk management teams, and the back office for compliance and regulatory reporting.
In some respects, integrating ESG data into an investment process is no different than other types of data or analytic, such as financial data pulled from stock exchanges or brokers. But ESG data comes with one big difference: it must be marked to individual securities, not portfolio or aggregate levels. This is because ESG data is about specific company risks, and this must be accounted for in regulatory reports.
“There’s no off-the-shelf solution,” Founta said. “You need flexible systems to manage this.”
How flexible are you?
Consistency appears to be a holy grail for asset managers and ESG. “We try to be consistent and develop specific performance indicators once we have enough data,” said Fidelity’s O’Donnell.
As sustainable investing becomes a bigger priority in Asia, this comes with its own headaches, notably the soaring prices charged for ESG data. Asset managers are incorporating more vendors that use artificial intelligence sifting through sensor-derived data, to complement traditional vendors that rely on vast teams of human analysts.
A.I.-based ESG vendors also complement investing by providing daily or real-time updates, be it from satellite imagery to sentiment analysis of companies – in contrast to traditional ESG vendors that might update their ESG scores only once or twice a year.
All of this comes at a cost, however, and no one vendor covers everything in the broad universe of ESG factors. Big global investors can source more, as well as support their own due diligence. Smaller fund managers, hedge funds and other boutique firms may not have that, but they can start small and change vendors if they need to.
“These vendors don’t so much compete as they complete one another,” said Founta at State Street. “Finding the right mix requires flexibility.”