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In the past weeks I have visited many Asian institutional investors to talk about sustainability investing. I was positively surprised by the amount of genuine interest in the topic. There was considerable appetite for knowledge sharing and most investors informed us they were starting the process of implementing sustainability in their investment portfolios.
Their success in achieving this will depend on the extent to which the many parties active in the field of sustainability offer sufficient research on local companies and whether the right investment solutions exist. In both cases a more Asia-oriented approach is needed. Furthermore, it struck me how important the human element is and that those investors who are genuinely interested in and committed to the topic will be the most successful in achieving change.
Japan is a country where sustainability investing seems to be really picking up. The two days I was there were completely packed with meetings. The clear momentum in this country is being driven by the introduction of the corporate governance and stewardship codes and by the fact that large institutions are taking the lead and committing parts of their portfolio to responsible investing. Some are more vocal about it than others. I met with one large pension fund that has actually been investing in a best-in-class ESG portfolio for many years, but has not really communicated this to the outside world. As humility is wisdom in Japan, most investors emphasize that they are still in the early stages and are still learning about sustainability investing. Let’s hope this will lead to action in the future.
In other Asian countries I met with some larger institutional investors who seem to be taking smaller steps. They are developing ESG questionnaires to use in their selection process to assess managers’ sustainability investing strengths. Having a sound ESG policy and practices is already a prerequisite for asset managers working with Northern European clients, but I believe it will soon be a prerequisite globally. We shared with them our belief in the importance of a thorough assessment of a manager’s ESG practices. It is no longer enough to be a UNPRI signatory, implicitly take ESG into account, or occasionally engage with the companies in your portfolio. How you implement the UN principles, how you structurally take ESG into account, and engage with companies and keep track of results, are what it’s all about.
These institutions are also working on implementing ESG integration in their own (local) portfolios, but they face many hurdles. These include building up knowledge and investing in teams, low coverage of local small and midcap companies by ESG research providers, deciding which providers to use for voting and how to effectively set up engagement with companies and collaborate with other investors. Sharing our knowledge with them will speed up the process and help investor engagement across the globe.
On the private and retail banking side there is a clear need to show clients the alpha potential of an ESG strategy and to develop products customers can relate to. Even though research shows that private investor demand for sustainable investment solutions is increasing, this was not the general feeling I got from the banks I met. There is demand from ultra-high net worth clients and this will be fulfilled, but it is still a challenge to provide solutions for high net worth clients and others. I am afraid hiding behind the alpha search argument is going to hold back developments. It is much more effective to have a clear vision and to believe in the importance of ESG for investors and society alike. I am sure those that do will be successful in both of the major aspects (wealth and well-being).
The meetings I enjoyed most were those attended by top management and the people actually responsible for implementing ESG in portfolios. Both top management and the ESG specialists were highly motivated and of course there were questions on alpha creation, but it seemed as if this station had already been passed. Those present were very engaged and asked relevant questions on the implementation of voting, engagement, quantitative ESG research, manager selection etc. It reinforced my opinion that building human (intellectual) capital is extremely important in furthering ESG efforts in our industry. It all comes down to the people.
Flying to five countries in Asia probably did not contribute to a better environment, which is actually one of the reasons I went. So that is a bit of a contradiction. At Robeco, we are aware that even though direct CO2 emissions are not a major aspect of our company’s business, traveling can still have a significant impact. So this is why we try to reduce our carbon footprint and compensate the remainder. Robeco has signed a declaration stating that we aim to reduce the CO2 emissions resulting from the activities of every one of its employees. Robeco has achieved CarbonNeutral® certification by reducing CO2 emissions to net zero in accordance with The CarbonNeutral Protocol.
This is our monthly column on sustainability investing by Head of ESG integration Masja Zandbergen.