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ESG standards subjective; levels of integration vary | Hong Kong Economic Journal

Published on February 1, 2021 by Yip Shing, Hong Kong Economic Journal

Considerations are subjective; levels of integration vary

 

Special interview: Once labeled a niche investment, environmental, social, and corporate governance (ESG) funds are shaking off the misnomer as their numbers spike thanks to a groundswell of interest in sustainable investing. Elsa Pau, CEO of WealthAsia and founder of fintech portal BlueOnion, pointed out that many asset management companies claim to have fully integrated ESG elements into their investment process. Still, the issue of how high the integrations are is debatable. It is prevalent for different fund managers in the same company to be inconsistent in their considerations regarding ESG investing.

In an interview with the paper, Pau said when fund managers allocate money to ESG funds, their investment strategy is basically “exclusion,” that is, to rule out from their scope of investment enterprises that are not in compliance with ESG principles. But in practice, fund managers vary in their approach, and as a result, the ESG investing philosophy is not wholly integrated top-down into the investment process.

Striking out alcohol stocks; Kweichow Moutai a dilemma

Let’s say in equity funds; breweries are widely regarded as an unethical trade. Pau said that while it is easy for European equity funds to strike out such companies from their portfolio, the same cannot be said for Kweichow Moutai (600519:SH), an A-share heavyweight stock, which requires fund managers in Chinese equity funds to balance the trade-offs. “How do we use the same yardstick to measure this? How do we integrate (ESG elements) into the whole investment process… what is the level of integration? And that’s the most important thing.”

Founded by Pau, BlueOnion is a digital platform that rates the ESG performance of over 100,000 funds, with a database covering listed companies that makeup 85% of the global market value. Besides relying on ESG reports produced by listed companies, the platform can curate ESG-related news using AI technology to build up ESG big data, which is updated quarterly.

Foreign fund houses execute strategies better

Pau thinks that overall the industry has been increasingly focused on ESG investing, but there is room for improvement in execution. Every year, Benchmark gathers a panel of finance industry experts to give their ratings for each fund. One of the criteria is the fund’s performance in ESG investing. This puts pressure on the fund companies and pushes fund managers to boost their ESG investing.

Foreign fund houses, Pau added, are more resource-rich and therefore can better carry out their ESG investing strategies. For instance, foreign fund companies have a dedicated watchdog to exercise shareholders’ voting rights at annual general meetings (AGM) to spur the top executives of the listed companies to improve on their ESG performance.

The BlueOnion platform is currently open for use to institutional investors, including retail banks that want to examine the funds’ ESG ratings. Pau said: “When banks offer a fund product, they have to explain to investors why they chose this fund.”

But if banks merely look at the past returns criteria to pick a fund, when the young generation of investors begin to pay more attention to ESG investing, these banks will face the risk of losing their customers.

Elsa Pau thinks that foreign fund houses are more resource-rich and can better carry out their ESG investing strategies.

This article was originally published on Hong Kong Economic Journal by Yip Shing in Chinese

Translation by: Tom Koh