On the wave of greater emphasis on ESG and sustainability when evaluating investment opportunities, how should Taiwan government and corporates react?

Green Mentor's Fireside Chat

2019 is an important year for ESG investment

  2019 is perhaps the year when awareness on ESG investment achieved mainstream status among investors in Asia. Asia, aside from perhaps Japan, is still in the early stage compared to Europe and US but has caught up rapidly over the past few years. It is interesting to note that pension funds are the main push behind ESG and sustainability in the Europe (similar reason why Japan is ahead in ESG and sustainability compared to other parts of Asia) but play a smaller role in the financial market in Asia. I do not mean that pensions are small in Asia (Three of the 10 largest pensions are in Asia) but they tend to be operated in the background and take a more conservative approach. This may change in the future (we will discuss this later in the article). The push towards ESG and sustainability instead has been taken by an interesting group – the family offices of wealthy families.

Investing in ESG and sustainability – why it does attract the family offices?

  What is the common factor among ESG investment, social media and fast fashion? They are things that appeals more to millennials than their parents. Therefore, it is also not surprising that a lot of family offices (now led by the second or third generation) are now taking the lead in driving investment in ESG and sustainability in Asia to the level seen in Europe. Traditionally, family offices look at the creation of lasting legacy through the lenses of philanthropy but are now looking to create the same through investment portfolios that deliver social and environmental returns (in addition to protecting and increasing personal wealth). The concept of investing with a purpose has to some extent replacing philanthropy.

  A research by Standard Chartered Private Bank (24 June 2019) found that ESG funds are expected to make up 20% of Asian high net worth portfolios as they look to create a better future through their investment dollars. I believe a large part of this interest is driven by awareness (in the same research, awareness increased from 20% to 30% in just 1 year) but a lot more has to do with the change of consumer behavior and strong brand preference to be associated with sustainability.

  High net worth families or individuals are drawn to ESG as they see ESG as a way to build lasting legacy (other than just planning for their wealth) and also to develop a more positive public image. In most Asia countries, wealthy families or individuals are seen to be less interested in the general welfare of the public despite having the resources to make a difference. As such, it is not surprising to see the new generation of high net worth families publicly showing that they care, hoping to change the public perception of how their wealth is not just a privilege but also a responsibility.

  The other factor is also these high net worth families, who are also like to have occupied (or still occupying) senior management role in large businesses, see the value of a positive brand awareness on their businesses. A number of researches have shown that businesses with focus on ESG tend to perform better in their financial performances as well. As such, they could also be transferring this business know-how to the management of their personal wealth.

  No matter the reasons, they are taking charge of the push for greater ESG and sustainability awareness in Asia.

What are we seeing in Taiwan?

  In Taiwan, we do see the same trend but more driven by financial institutions. They recognize that embracing ESG and sustainability principles and is essential for the survival and ultimately success of their business. Amid greater media scrutiny on large corporates after the many corporate scandals and volatile markets, these financial institutions understand that investors expect them, particularly those leaders at the top, to take the lead to win the trust of the public and deliver returns.

  It appears that a strong motivation for ESG and sustainability is to gain trust of the public. Is public trust so fragile that corporates must do so much more to gain or maintain the trust. The answer is a resounding yes. Since the Great Financial Crisis, public's trust on large corporates, particularly large financial institutions, is very low and many are believing that financial institutions have grown too big and too powerful to be controlled and falling short of pushing government to consider options to rein down their growth. This is clearly a big topic and outside of the scope of this article. Nevertheless, the point here is that trust is a very valuable asset and as such a strong focus on ESG and sustainability is taking a good role in helping large corporates in Taiwan to "acquire" trust.

How can Asia pension funds be more active? 

  Speaking on trust, does pension funds in Asia also need to start gaining or maintaining public trust by taking a strong position on ESG and sustainability? The answer is yes, and they are taking steps to do so although some may perceive their action as baby steps. Most pension funds in Asia operate under mandate determined by the government and changes often require extensive debate before they can be approved. There is no doubt that ESG and sustainability need to be incorporated into pension funds' investment mandate, but the question is how quickly.

  We have seen small steps taken through the introduction of ESG-related indices that will help channel some of the pension dollars into corporates with strong ESG and sustainability practices and in turn encourages more corporates to do the same. The next step would be to integrate ESG principals and greater sustainability focus into their investment process. For example, South Korea's National Pension Service (NPS) has signed up to the Principles for Responsible Investment.

  I think more and more pension funds will join the ranks of NPS and take a greater stance on ESG and sustainability, just like their global counterparts.

  I may have raised many obvious questions in this article, but the point here is that ESG and sustainability is now more "commonsense" than ever before, and this is good thing (something to celebrate). The days of "maybe later" are over and it is now the time where adherences to ESG and sustainability are mainstream across Asia and it will not be long before ESG and sustainability become basic requirements for all corporates, no matter big or small. There are still a few more giant steps to take but we will get there.

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