A new study reveals that although a majority of investors are implementing ESG strategies, there appears to be a lack of available data to give this trend more of an edge.

While a majority (72 per cent) of institutional investors in Asia-Pacific are implementing an environmental, social and governance plan in their investment process, a lack of data hinders the adoption of such strategies, new data shows.

State Street recently surveyed 582 institutional investors and 750 individual investors, of which APAC investors comprised more than 33 per cent and 28 per cent of the sample sizes, respectively.

Titled The Investing Enlightenment: How to combine Principle and Pragmatism to achieve sustainable value through ESG, the study found that many of the traditional barriers to ESG integration are decreasing. 

There has been growing interest, and industry commentary, around ways that environmental, social and governance concerns can be built into investment, amid a desire to bring about changes that go beyond traditional concerns about maximising shareholder returns. This issue remains controversial, because there remains debate on whether ESG-slanted investment is superior to, or less effective than, traditional investment in delivering superior risk-adjusted returns. A number of studies seem to bolster the “doing well by doing good” approach, however. According to a recent report by Boston Consulting Group and MITSloan Management Review, investments that deliver financial results are closely correlated with those that are deemed sustainable (Investing For A Sustainable Future, 11 May, 2016). Separately, a study by Barclays found that investment-grade bonds with higher ESG scores outperformed those with low ESG scores between 2007 and 2015 (source: MSCI).

Uptake of ESG-influenced investment varies by region. In Asia, adoption has been relatively slow, although it is growing. According to the Global Sustainable Investment Alliance, out of all ESG-related investments, worth $21.4 trillion in 2014, Asia accounted for $53 billion, but with a 32 per cent growth rate (source: GlobalCapital.com). This year, the Hong Kong Exchange introduced a compulsory “report or explain” for listed companies on their ESG policies. The Singapore Stock Exchange has launched sustainability indices. Heading West, there are sustainability indices operated, for example, by the FTSE Index business, such as its FTSE4Good Index Series.

Returns
In other details of the State Street survey, meanwhile, of the APAC institutional investors surveyed, 60 per cent thought it possible to align material ESG issues and financial performance and 58 per cent did not believe ESG led to lower returns. 

Still, 71 per cent of APAC respondents saw three-plus years as a realistic time frame to gain outperformance from ESG investments and just 8 per cent said they considered fiduciary duty a barrier to ESG integration.

Despite this decrease in traditional barriers, the study also revealed a lack of available, transparent ESG data, which is sought by many investors.

Some 87 per cent of APAC institutional investors surveyed wanted companies to explicitly identify ESG factors that materially affected performance, and 58 per cent cited a lack of industry standards for measuring ESG performance as a significant barrier to full integration.

Half of APAC retail investors surveyed wanted to see more companies reporting ESG performance-related data and 56 per cent said they needed more ESG data from other sources to make educated decisions. 

In a bid to help investors integrate ESG strategies more easily, State Street developed a model based on five actions: take ownership – make sure there is decisive support from the organisation's board on ESG issues; get educated – provide training on ESG across the investment organisation; ask – ask companies for data; incorporate a materiality filter – get the correct material data; align time horizons – adjust performance metrics and incentives structure to reflect the long-term nature of ESG investing. 

“We’ve seen significant progress in investors’ understanding of ESG over recent years but believe further progress can be made to move more investors from awareness to full ESG integration,” said Lou Maiuri, executive vice president and head of the State Street Global Exchange and Global Markets businesses. “By creating a clear intersection between our core company values and how we help clients achieve their outcomes, we can turn aspiration into action.”

The study, conducted from November to December 2016, was led by State Street’s Center for Applied Research and co-authored by Professor Bob Eccles of the Harvard Business School.