ESG investing: Asia more focused on real-world impact, while Europe is ticking boxes

REGULATIONS in the European markets have driven sustainability investing to be a box-ticking exercise for many investors and investment managers, said John Green, chief commercial officer at Ninety One.

In contrast, the conversations about investing with environmental, social and governance (ESG) considerations in Asia are more about real-world impact, he added.

Speaking to The Business Times on Tuesday (Sep 20), Green said that his experience at Ninety One, an investment management firm which started from South Africa, has given him an emerging market lens to sustainability investing.

Typically, emerging market economies, which are mainly in Africa and Asia, would need to generate more power for their economies to grow in a fair way.

But the focus on disclosure and reporting regulations in Europe puts corporates in emerging markets in a disadvantageous position, since their country’s infrastructure limits, such as a heavy reliance on fossil fuels, would affect how quickly they can transit. Their reported carbon emissions data would also naturally be more intensive than those from developed markets.

And financial institutions have, thus far, taken a more short-term approach to carbon reduction by cutting down their holdings of such heavy-emitting assets. While these moves have a portfolio impact, they do not have real-world impact, he noted.

In Asia, however, there is a more cautious approach to thinking about the implications of ESG in the real world, said Green.

“So much of the financial ecosystem (in Europe) is focused on backward looking data. ‘I need to be able to report, I need to be able to show that this is really doing the job that it needs to do.’ And the consequence of that, is that investors migrate to the easiest data, as opposed to thinking about what is really having an impact,” he added.

“Every asset owner can report on the carbon intensity of their portfolio, but that’s backward-looking. No asset owner can report on potential future emission delta and that is the golden piece of information, which is where will we be able to reduce emissions the most,” he also added.

This focus on disclosures and reporting has pushed capital away from the problem, and not towards it, the chief commercial officer said.

Believing that capital should be used to drive decarbonisation differently, he said that Ninety One, which has a total of US$165 billion assets under management as of June this year, invests in heavy-emitters and work with them on their transition plans.

Ninety One is more active in debt capital markets, as Green thinks that being a debt holder has more power to drive change than being an equity holder.

That’s because equity adjustments can’t always be directly linked to a corporate’s performance on their transition plans, but they may face difficulties refinancing their debt if they do not show debt holders their decarbonising strategies.

This is more effective for heavy-emitting companies as they tend to be bigger borrowers, he said.