Responsible investing in different cultural contexts 4


FREEPIK

(Last of four parts)

Time flies when you are locked down at home — and it has been a nice recollective journey around the globe the past three weeks writing about the state of Sustainable Finance first in the United States and Europe, moving over to Latin America, then Africa, and today circling back home to the Asia Pacific region. Why is it important to examine other geographies before our own? Well, to compare our development of course.

Our region is unique in that while it is raging in growth, it also is home to some of the largest inequal distributions of wealth as well as levels of development that make it exceedingly difficult to form any generalizable statements on the region from an economic perspective. Further, the countries within the region are so culturally diverse with a myriad of languages that do not communicate with each other, making it impossible to really characterize Asian practices in any specific way.

What is common though is that several government owned funds in the emerging economies are leading the Responsible Investment (RI) movement, creating momentum across the region. The Government Pension Fund of Thailand (GPF), a founding member of the PRI, the South Korean National Pension Service (NPS), and Malaysia’s Sovereign Wealth Fund Khazanah are examples of regional RI champions. NPS began investing in RI funds in 2006 and more local pension funds have expressed their interest in RI since. Some funds have partnered with those in Europe to invest in things like clean energy and waste-to-energy projects, although this is just a small amount compared to the total investment universe.

Hong Kong and China, however, do not have the same story. The main reason is that corporate pension funds are still in their infancy in China. Signatories to the UN Principles for Responsible Investment (UNPRI) in Hong Kong are mostly private equity (PE) firms. Among the PE projects, infrastructure investments are the focus (e.g., social infrastructure including public facilities such as schools and hospitals, utilities such as energy, water and waste management companies, and transport including mass transport systems, toll roads, and railways.) Because of the urbanization of this region, these types of investments are fundamental in growing cities and satellite towns in Asia, where rapidly expanding populations put a strain on local resources and infrastructure.

Due to the high presence of foreign direct investments in the region, those who are driving RI awareness and practice in Asia are foreign fund managers, unlike in Europe and the US where local asset owners are the major drivers in the sustainability market. For instance, BNP Paribas established the first Asian environmental equity fund “Green Tiger” and the first Greater China Environmental Fund. Further, the concept of shareholder activism is not well developed in most Asian jurisdictions. Foreign fund managers usually engage privately, especially in countries where family ownership dominates the business model, as in Hong Kong.

The state of RI in Australia is much more advanced than those of its emerging economy neighbors and is one of the most well-developed globally. Market players come from across the board: government funds, corporate funds, and pension funds and approximately half of the funds under management of Australian asset managers fall under UNPRI commitments to ESG (Environmental, Social, Governance criteria) integration. Australia also boasts a very developed sustainability index market.*

Recently, however, initiatives towards getting the markets more involved have begun. Bursa Malaysia and the Shanghai Stock Exchange recently introduced a mix of best practice ESG guidelines, sustainability indices, awards and specialist market services and 2010 saw the launch of the Hang Seng Corporate Sustainability Index (HKCSI) Series covering large and liquid listed companies in Hong Kong and Mainland China. The Hang Seng Corporate Sustainability Index Fund, which tracks the HKCSI, was launched in 2011. Most recently the Philippine Stock Exchange announced plans for an ESG index by 2022. This trails our first Sustainability retail fund which was launched earlier this year by ATRAM. There thus appears to be a plausible movement towards the creation of funds based on sustainability indices.

This March series has attempted to present how Responsible Investment adoption and practice is largely dispersed and to explain how the types of strategies being used differ based on the cultural context as related to religion, events in the institutional environment, social problems, development levels of the capital markets, and the pace of urbanization. In a similar vein, this chapter has highlighted that the key promoters of RI vary across geographies. In Europe, government-wide initiatives adopted by asset owners are driving a non-prescriptive ESG integration approach. In the US however, RI was born in response to religious teachings and civil societal pressures following catastrophic events, making the landscape more akin to investment considerations based on moral concerns. In Latin America, a largely Catholic region, RI is developing from a philanthropic approach wherein funds donate a percentage of their profits towards charitable purposes. In Northern Africa, negative screening is the norm, which adheres to Islamic finance principles of Shar’iah. In both Latin America and Africa, impact investing plays a crucial role for development. Finally, Asia is an interesting market with differing levels of adoption. In some geographies such as Malaysia, South Korea, and Thailand, government initiatives are driving RI whereas in Hong Kong, foreign fund managers are leading the practice. These differences are necessary to consider when studying the phenomenon, in order to avoid strong generalizations, to enable a clear understanding of cultural embeddedness and propensity for change, and to create proper tools, favorable legislation, and successful strategies for each institutional environment. n

*Some examples are ACT Australian Cleantech, ALTEXAustralia, Carbon Disclosure Leadership Index (CDLI) Corporate Responsibility Index (CRI), Ethinvest Environmental Share Price Index, FTSE4Good Australia 30, FTSE Shariah Australia, GS/ASX 300 Socially Responsible Accumulation Index, IPD Green Property Investment Index, Reputex Climate Change Opportunity, Reputex Environment Opportunity, Reputex Future Energy, Reputex Governance Leaders, and Reputex Sustainability 120 Index.

The original book chapter from where this series is based is published in Italian: Laurel, D. & Piani, V., 2013, L’SRI nei diversi contesti culturali (Socially Responsible Investing in Different Cultural Contexts) in Creare Valore a Lungo Termine (Creating Long-term Value), eds. Del Maso, D. and Fiorentini, G. EGEA (Milan, Italy).

Daniela “Danie” Laurel is a business journalist and anchor-producer of BusinessWorld Live on One News, formerly Bloomberg TV Philippines. Prior to this, she was a permanent professor of Finance at IESEG School of Management in Paris and maintains teaching affiliations at IESEG and the Ateneo School of Government. She has also worked as an investment banker in The Netherlands. Ms. Laurel holds a Ph.D. in Management Engineering with concentrations in Finance and Accounting from the Politecnico di Milano in Italy and an MBA from the Universidad Carlos III de Madrid.