Asia’s asset managers trail Europe in managing ESG risks: WWF-Singapore

ASSET managers in Asia lag their European counterparts in managing climate and nature-related risks, according to a report by WWF-Singapore.

The non-profit environmental group based the conclusion on a scoring framework it developed to measure asset managers’ ambitions on sustainability, as well as their policies, processes and products. Asia’s asset managers, excluding those in China and Japan, had an overall score of 33 per cent. The overall average score in Europe, meanwhile, was 77 per cent. Japan’s asset managers scored 62 per cent, while China was rated at 22 per cent.

Nonetheless, fund managers in Asia excluding Japan and China performed better than they did in 2021, with their scores improving by 3 percentage points. Europe and Japan’s asset managers also showed similar progress.

China was the only exception, with its score declining by 7 percentage points from 2021.

The overall average scores were determined after assessing 22 European and 18 Asian asset managers, comprising six from China, five from Japan as well as Singapore, and two from India.

The report only included investors that were signatories to the United Nations Principles of Responsible Investment. European fund managers with a minimum of US$200 billion in assets under management and had a presence in Asia were included in WWF-Singapore’s assessment.

The study also included fund managers from Asia that were headquartered in the region, with a minimum sum of US$20 billion in assets under management.

Nature-related risks

One area where Asia’s investors trailed behind their European counterparts was in the management of nature-related risks.

Only 33 per cent of Asian fund managers recognised nature-related risks, compared to 73 per cent among Europeans.

WWF-Singapore found that none of the Asian asset managers had voting policies and expectations on investee companies on urgent issues, such as managing water risks, protecting oceans and ending deforestation.

“Although many of the assessed asset managers are increasingly recognising the importance of nature-related risks by incorporating risks such as water and deforestation or biodiversity loss into the investment decision-making process, this is not reflected in their actions through voting policies and establishing proactive expectations of their investee companies,” the organisation said.

WWF-Singapore recommended that Asian asset managers prepare themselves for the impending wave of nature-related standards and reporting, by integrating nature-related impacts, dependencies, risks and opportunities into all financial decision-making.

It also suggested that all asset managers take more proactive steps to set voting guidelines on water risk-related issues and include explicit expectations on investee companies to understand their water risk and to practise water stewardship.

Governance and sustainability-related KPIs

Asia’s fund managers were also behind their European counterparts in governance and linking environmental, social and governance (ESG) performance to remuneration.

Europe scored 68 per cent on governance, which looks at the presence and quality of oversight management structures within an asset management firm and reviews how the board level is engaged with sustainability issues. Japan was just slightly behind at 63 per cent, while China – 19 per cent – and the rest of Asia – 29 per cent – lagged far behind.

Seven in 10 European asset managers included ESG metrics in employees’ key performance indicators (KPIs), while only 14 per cent of their Japanese counterparts did so. No asset managers in China and the rest of Asia implemented such a remuneration incentive.

Sustainability investing disclosures

Out of 40 asset managers surveyed, 74 per cent released annual reports on their sustainability investments.

However, only 38 per cent of Asian asset managers did so, compared to all European asset managers.

As for their voting records, 73 per cent of asset managers disclosed them in full. Again, only about 38 per cent of Asian asset managers did so, compared to all the European ones.

In response to queries from The Business Times, a spokesperson from the Investment Management Association of Singapore said that it would not be entirely appropriate to compare Asia against Europe, which has had a much earlier start on ESG issues, adding that every region has different challenges.

The spokesperson noted that the industry in Singapore has become more alert on environmental risk considerations and broadly put in place measures to track them since the Monetary Authority of Singapore introduced guidelines on environmental risk management.

“The industry is quite diverse; some players are a little ahead of others. The general trend though is towards greater stakeholder engagement, pushing towards better stewardship, and improving responsible investing disclosures,” the spokesperson added.

Monica Bae, director of investor practice at the Asia Investor Group on Climate Change, said that Asian investors are becoming increasingly aware of nature-related risks. But they are still at an early stage of this journey, she added, noting that there is differing progress in implementation among investors.

“Investors recognise opportunities from nature-positive investments, and that nature loss poses a major risk to businesses, however this has yet to translate to action. Many respondents have not yet conducted an assessment or integrated response to nature and biodiversity risks,” she said.