Asia takes more pragmatic approach to ESG investing than EU: Aviva Investors
But climate-focused funds may find it challenging to find suitable Asian investments
ASIAN investors lean towards a more pragmatic approach in environmental, social and governance (ESG) investing, noted Thomas Chinery, co-lead portfolio manager of Aviva Investors’ climate transition fund in a recent interview with The Business Times.
His engagement with investors in Singapore seems to indicate that their focus is not so much about having a green portfolio. Instead, they are more focused on achieving real-world decarbonisation by getting carbon-intensive companies in which they have a stake to make the low-carbon transition, on top of achieving financial returns.
“It’s the opposite of box-ticking... There isn’t black and white in the world. We need to make sure that when you’re looking at investments, you’re doing at it through that pragmatic lens,” said Chinery.
In comparison, European Union investors who adopt an exclusion-based strategy on such investments may be too dogmatic. The relative inflexibility stems from EU investors having to abide by some of the economic zone’s regulations that are aligned with the Paris Agreement to limit global warming to 1.5 degree Celsius, or well below 2 deg C.
“A Paris-aligned benchmark is essentially an exclusionary benchmark to achieve net zero (emissions) by 2050 according to the Paris Agreement. It’s quite a blunt tool, and in Europe, there is regulation that pushes investors towards something simplistic like that. So a lot of the conversations you have are around the exclusions and how that supports being Paris-aligned,” said Chinery.
“I think when people are very focused on just hard exclusions, it doesn’t help inform the process, and it doesn’t help support those companies. If you just exclude all the bad companies from financing, that doesn’t help drive that change – and that’s what needs to happen,” he added.
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Getting their portfolio companies to transition is especially crucial for Asian investors, as they tend to have higher exposure to such “dirty” assets – which refer to carbon-intensive companies such as those in the fossil fuel industry – than their counterparts in the EU.
Challenge to find suitable Asian companies
However, funds such as the climate transition fund that Chinery manages encounter challenges when looking for suitable Asian companies to invest in.
For one thing, the companies may not be able to hit the threshold to be included in the fund.
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The fund Chinery manages has a size of US$459.8 million as at the end of July this year. It invests at least 70 per cent of its total net assets in bonds of companies responding to climate change, and is label-agnostic.
The fund’s investable universe is limited to only investment grade corporate bond issuers, thereby excluding many corporate bonds issued by companies in Asia. Its investment parameters are defined by a global benchmark index set by Barclays, which currently contains about 2,200 investable companies, though most are predominantly in the EU and the US.
Corporate issuers in China account for 1.2 per cent of the investable universe, while other jurisdictions in Asia – including Australia – come up to about 6 per cent.
Secondly, the climate transition fund has quite a strict exclusion on fossil fuel companies. Companies that derive their revenue from thermal coal, as well as oil and gas reserves, are among some that would be excluded.
This means that financial institutions in Asia-Pacific are the only issuers that the fund could potentially invest in.
“We consider that some of the financial institutions out here, the ones that we can potentially invest in, do tend to have very strong transition plans, and actually are up there with some of the best in the world... So we don’t particularly have exposure to corporates in the Asia-Pacific region, because that’s not part of our benchmark. But the progress we see on transition out here through the financial institutions is strong,” said Chinery.
“But obviously, (the pace of transition) is going to be a bit slower than some other jurisdictions, because of the natural reliance on current coal generation as it stands,” he added.
Besides the banks’ exposure to coal, the spreads from financial institutions in this region are also tight, and unable to generate much alpha.
That being said, Chinery pointed out that the fund is still able to support Asia’s decarbonation due to a carve-out – 10 per cent of its assets under management could be used to invest in companies that fail the fossil fuel screening criteria, if they have set detailed and ambitious transition plans.
“The way we use our carve-out from that fossil fuel screen has been quite well received. So long as companies’ targets and plans are aligned to decarbonising their portfolio within a certain timeframe, then we’re quite happy with that, and they are then considered to be used for that overwrite,” he added.
With the fund hitting its three-year mark, Chinery said it is looking for more investors. While it has a negative annualised return of -0.97 per cent since its inception till the end of July this year, he noted that this includes the fees investors had to pay.
On a gross performance basis, the fund is outperforming the benchmark by 75 basis points year-to-date, and is among the top 25 per cent of performers compared to its peers.
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