ESG a culture for asset manager

Companies in the Asia-Pacific need to go the extra mile in their sustainable development goals to ensure long-term growth. Wang Yuke reports from Hong Kong.

Environmental, social and corporate governance factors are becoming all the more important for the performance of companies on the Chinese mainland, not only in the long term, but also in the short term as well.

This is driven and necessitated by regulations to ensure that these non-financial factors can be sustained, says Thomas Kwan Chi-wang, CEO of Harvest Global Investments — the Hong Kong-based international arm of Chinese asset-management giant Harvest Fund Management.

To no small extent, the mainland’s tightened environmental policies and enforcement have prodded enterprises to jump on the sustainable-growth bandwagon, he said. If a company fails to comply with or double down on sustainable practices, it will slide into a predicament and a disadvantageous situation in which investors will turn their backs on the company. And these companies “won’t survive at the end of the day,” Kwan said.

Companies with a record of high carbon intensity are compelled to “find a way to convert their products and operational procedures to low-carbon alternatives,” Kwan said. Otherwise, they will lose out, he added.

Despite the frisson of excitement and vibrancy of ESG investing in China, this investment concept is still in a nascent stage in the country and across Asia, Kwan said.

A recent survey by BNP Paribas — the largest French banking group and the largest bank in the eurozone, — found that asset owners and institutional investors in the Asia-Pacific were lagging far behind in incorporating ESG into their strategic decision-making processes, compared with North America and Europe. Hong Kong and the mainland were way back, with 75 percent of investors incorporating less than a quarter of their assets into ESG investments.

Kwan said the Asia-Pacific’s slow ESG performance is due to the late start and lack of investor interest in the region in recent years. In Europe, ESG investments are primarily driven by demand from asset owners, such as family offices and pension funds for long-term sustainable growth. The European approach is in contrast to a top-down, policy-driven approach in Asia despite increased ESG awareness among Asian asset owners.

Kwan has more than 20 years’ experience in investment management. Before joining Harvest Global Investments, he had worked at Baring Asset Management as head of Asian debt; with First Sentier Investors in Hong Kong as portfolio manager; with Prudential Asset Management as investment director in Singapore; and in Beijing as director of Asian fixed income and currency.

Kwan has witnessed the paradigm shift in ESG investments or, in a broader sense, sustainable investments, in Hong Kong and Asia over the past two decades.

“Corporate governance, or the ‘G’ factor, has long been part of the financial analysis,” he recalled. “But the ‘E’ and ‘S’ factors have only begun to be put on the table in China since 2016 when the nation started pursuing quality growth. Stringent environmental policies have had a direct impact on some high-polluting companies through fines and penalties.” China’s carbon neutrality pledge last year has further prompted  high emitters to reconsider their business development strategies for the next few decades.

Thomas Kwan Chi-wang, CEO of Harvest Global Investments. (PHOTO PROVIDED TO CHINA DAILY)

There was little reckoning of responsible investment and the importance of sustainability in ensuring a company’s long-term returns in China until in recent years when the country set its ambitious goal of achieving carbon neutrality by 2060. Under the 13th Five-Year Plan (2016-20), sustainable development goals were explicitly outlined. The China Securities Regulatory Commission in June published information-disclosure rules for all listed companies, making it mandatory for them to disclose any administrative penalties relating to environmental issues in their annual and semiannual reports. The regulatory body has galvanized domestic companies into doubling down on their environmental sustainability management. For domestic corporations, the progressive policies have served as a wake-up call on ESG operations and strategic planning, Kwan said.

There is also growing demand from investors. Foreign investors have to meet their fund’s respective domicile standards on ESG when investing in Chinese assets, spurring Chinese companies to place a greater focus on sustainable operations. “If you don’t, asset owners will go away,” he warned.

A new regulation, Sustainable Finance Disclosure Regulation, which took effect in Europe this year, also has a direct or indirect impact on Hong Kong managers by influencing fund management, Kwan said.

The new regulation establishes a set of rules in a bid to make the sustainability profile of funds more straightforward and create a transparent level playing field to eliminate “greenwashing”, in which some financial firms claim that their products are sustainable but, in reality, they’re not.

“It has a cross-territory impact on Hong Kong managers, nudging them to equip themselves seriously in terms of ESG integration,” Kwan said. The spirit of ESG in Europe is not only about producing a better quality-returns portfolio, but also more about nurturing a sustainable development culture in the economy and society, he said.

To shape a sustainability climate embedded with an ESG concept across all industries in Asia, responsible investors and participants in the capital market must be more actively engaged with companies they invest in to raise ESG standards, Kwan said. He encourages investors to work together with the invested companies to identify their inadequacies on the ESG front and work out solutions to fix them. Only by doing that can investors help spread the ESG message across the board, upgrading ESG standards, motivating companies to go sustainable in their operations and ultimately fostering a more-sustainable economic growth in the country, he said.

In the past few years, Harvest Global Investments has built up a localized ESG analytical framework that can identify the key ESG issues of companies in China. “We’ve already incorporated ESG consideration in our company’s research process. And we place ESG integration at the center of our investment process for our offshore clients as they demand high standards of ESG investing in China,” Kwan said.

The company uses its own ESG evaluating system, which contains 23 indicators and over 110 metrics, to rate companies on their respective ESG performances so that it can help its clients make informed decisions on investment.

Having grown in tandem with Chinese markets for 13 years, Harvest Global Investments said that now is the prime time to unleash the asset-management potential on the mainland.

Kwan welcomed the Cross-boundary Wealth Management Connect and the Bond Connect programs launched in the Guangdong-Hong Kong-Macao Greater Bay Area, saying they’ll benefit Hong Kong and mainland investors by “broadening and diversifying the range of products for investment”. “The programs are also new channels for investors on both sides and have set up a good infrastructure,” he said.

How effective the programs will be will depend much on whether the investment products can cater to investors on both sides of the border. “I’m sure that ESG-framed investment products will gain greater momentum within a short time,” Kwan said, adding that the recent phenomenon of “renewable energy, electric vehicles and innovations that combat climate change were popping up”.

The trend is a sure thing, driven further by the fact that more managers are embracing the mindset of incorporating ESG in their research and investment decisions, Kwan said.

“Ultimately, it’ll have a massive impact on the overall investment criteria. ESG is an emerging investment culture that everyone in the business and financial industry will partake in.”