Pictured: David Smith, Aberdeen Standard Investments, Nina Hodzic Allianz Global Investors, Satoshi Ikeda, Financial Services Agency, Japan, Jenn Hui Tan, Fidelity International, Kamran Khan, Deutsche Bank, Eric Bramoulle, Amundi and Daniel Yu, The Asset

But, when it comes to regulation, there is a great disparity in how the world’s major markets are addressing ESG-related issues. As Eric Bramoulle, CEO of South Asia, Amundi explains, Europe has had a head start on the AsiaPacific region, with the European Union having already published a common classification system for economic activities, known as the Taxonomy Regulation.⁵ “Since the European market has been the most advanced on the topic, it is important to look at what their regulators are doing,” said Bramoulle.

"Globally, the tide of new regulation – in terms of sustainable finance – has been on the rise"
Satoshi Ikeda, Chief Sustainable Finance Officer, Financial Services Agency, Japan

Last year, for example, the European Securities and Markets Authority (ESMA) proposed changes to MiFID II – an EU legislation put in place following the financial crisis to improve protection for investors. The new changes require advisers to incorporate clients’ sustainability preferences as part of the existing suitability process.⁶ This is likely to be a game-changer for investment advisers. For the first time, firms will have to consider specific, non-financial factors when carrying out a client suitability assessment and when demonstrating ongoing suitability. “In Europe, we are moving away from ESG integration and more towards making an impact,” explained Nina Hodzic, Head of Sustainable and Impact Investing, Allianz Global Investors.

“But there is not going to be a simple copy and paste from Europe to Asia,” notes Kamran Khan, Head of ESG for Asia Pacific, Deutsche Bank. Investors in North America and Europe are increasingly concerned with how ESG will impact their investments along the supply chains where they have low visibility. As a result, moving forward, “Asia will increasingly have a role in the standards being set up in Europe,” said Khan.

Figure 1: First audience poll

So, how exactly will the industry achieve ESG integration? According to the UN-supported investors’ network Principles for Responsible Investment (PRI), there are two common options for incorporating ESG into an organisational structure: firstly an integrated investment team, whereby the existing team conducts the ESG analysis and integrates it into overall investment analysis and decisions, and secondly a dedicated ESG team, whereby members conduct the ESG analysis and integrate this into overall investment analysis and decisions.⁷

While these may, at first, seem like simple steps to take, a number of roadblocks remain. Jenn-Hui Tan, Global Head of Stewardship and Sustainable Investing, Fidelity International noted that in his experience “it is quite easy to make a set of standards, but if you are trying to reengineer the way investment is done, the real struggle is changing the hearts and minds of those involved”. The challenge then, it not just the integration itself, it is securing the necessary budget, resources and personnel to achieve it.

"In five years, we won’t be calling this ESG investing, but simply investing"
Jenn-Hui Tan, Global Head of Stewardship and Sustainable Investing, Fidelity International

As more fund managers progress on their ESG journeys, the scale of the change needed may also not be fully appreciated by the market. David Smith, Head of Corporate Governance, Aberdeen Standard Investments reflected on the complexity of the task, explaining that given the intricacies of the diverse region in an economic, governance and environmental context, it is important to build out a strong team. “That is why our Asia-Pacific team is the largest so that we can get a handle on the sheer number of opportunities that are evolving and accelerating in the region,” said Smith.

Tan went on to say that, although only 15% of attendees reported their ESG journey to be ‘done and dusted’ (See Figure 1), he hopes that “in five years, we won’t be calling this ESG investing, but simply investing.” Some firms are on the right path in this respect. As of last year, for example, the DWS Group, Deutsche Bank’s Asset Management arm, made its entire product suite ESG-compliant. This, explained Khan, “is what we consider to be ultimate integration: where every portfolio manager, analyst and member of the team has gone through ESG training – making ESG part and parcel of all due diligence.”

Figure 2: Second audience poll

This is an area where Asia lags significantly behind its western counterparts, whose regulators have already made great strides in standardising ESG disclosures. Lacking a standardised approach, investors and investment managers in Asia use a combination of sources to inform ESG investment, including disclosed information, data from third parties, and raw data that needs to be sourced and analysed in-house. To put this complexity into context, Bramoulle explains that Amundi currently covers around 10,000 companies using 37 ESG criteria – and is working with 15 data providers as a result. “This produces a lot of data that takes a long time to compute – and this is where we are focusing a lot of our energies today,” said Bramoulle.

"Asia is hands down going to lead the way, as this is where the trickiest ESG investments are actually happening."
Kamran Khan, Head of ESG for Asia Pacific, Deutsche Bank

While many view the lack of data as a negative – as it prevents the industry from easily performing the proper analysis needed to make informed decisions – others view it as an opportunity to create a competitive advantage.⁹ As Smith explained, “we are in a situation where there is not as much disclosure of ESG data in the region – especially compared to somewhere like Europe or the US. This leads to a situation where we have an information asymmetry around ESG quality.” Often, this means that although companies may be involved in a number of ESG initiatives, the information is not readily available, as their disclosure lags behind – allowing companies with more informed, rigorous processes around data collection and analysis to get the upper hand.

For Khan, digging deeper into the data is a must for companies looking to make a well-informed investment decision. “When it comes to private data,” he explained, “it can, to some extent, be used as a crutch as to why something cannot be done. Yet, if you demand more data, more data will come – and this is where the smart money is at.”