ASIA-HEADQUARTERED fund managers have much to do to catch up in terms of environmental, social and governance (ESG) efforts, found a report by international law firm Morrison Foerster published on Monday (Nov 14).

The report, based on a survey of 100 Asia-headquartered fund general partners, found that less than half of respondents conduct ESG due diligence on every deal, while 46 per cent did so on most deals.

Further, more than a third of respondents said they did not always require the inclusion of ESG compliance clauses in investment documents. These clauses set out clear expectations and targets on key ESG issues and also address potential accusations of greenwashing, an area where regulators are increasingly active.

“There is no one-size-fits-all model, particularly given the absence of a regulatory framework in Asia against which to benchmark structures,” said researchers.

“However, general partners will need to be careful they do not treat ESG as a box-ticking exercise. It must be incorporated into investment decision-making, rather than treated as a mere compliance issue.”

Further, while a large majority of respondents recognised the importance of ESG in today’s investment climate, only 62 per cent of funds in Asia have an ESG committee. Less than a quarter have a dedicated ESG professional and even fewer link investment team compensation to ESG goals.

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On the social aspect of ESG, most fund managers have taken active steps to communicate the importance of diversity, equity and inclusion (DE&I) internally to promote improved DE&I in their organisations. However, only half of fund managers say they are committed to diverse representation in leadership. Just a third said they have made a financial commitment in this area.

The report further highlighted that fund managers have yet to see ESG due diligence as a necessary risk-mitigation strategy.

“Our findings reveal that many fund managers are still at an early stage of their ESG journey and this provides an opportunity for fund managers in Asia to get it right from the start,” said Susan Mac Cormac, global chair of Morrison Foerster’s ESG Group.

“Many general partners are making the mistake of only treating ESG as a compliance issue – whereas the real benefits in embedding ESG considerations are in driving value, managing enterprise risk, and reporting.”

The survey conducted by Asian Venture Capital Journal, on behalf of Morrison Foerster, polled the fund general partners with at least US$1 billion in assets under management on how ESG considerations are impacting their investments and the market.

By geography, 35 per cent of respondents were based in China/Hong Kong, 25 per cent in Japan, 15 per cent each in India and South-east Asia, with the remaining from other Asian jurisdictions, including Taiwan and South Korea.