In our conversations with asset owners about green finance here in Hong Kong, we have encountered a wide range of questions, issues and concerns. Read on for some thoughts…
China is leading the green finance initiative here in Hong Kong. The Hong Kong Green Finance Association (HKGFA), launched in September of this year, already boasts over 90 members. The Association was established to help make Hong Kong a global leader in sustainable finance, as well as to support the UN sustainable development goals, and uphold the Paris Climate Change Agreement. It will collaborate with local businesses, in mainland China and in markets across the Belt and Road, the Chinese government’s international development strategy — which stretches as far as Piraeus, in Greece! The move is reflective of the 180 degree turn that the Chinese government has taken in recent years in its attitude to environmental, social and governance (ESG) integration.
With so much in the pipeline, we collected the views of several Hong Kong-based organisations, to find out the burning responsible investment questions keeping them up at night…
It isn’t easy being green
In the absence of any formal criteria or a universally-accepted benchmark, we were asked for ideas on how to classify green products. Some of the issues outlined mirrored similar concerns to those our clients have expressed in Europe – including a lack of standardisation amongst index providers. While the view between providers on the underlying stock may be identical, different factors are deemed to be material in different top-down ESG scoring methodologies; leaving regulators confused as to how best to support and regulate sustainable investment products.
Asset owners are intensively researching how to best incorporate ESG principles in their investment portfolios. One of the organisations we spoke to described that they examine ESG integration from a risk perspective. They are looking at how governance and social issues are affecting companies’ supply chains, and ultimately posing a risk to their investments. For this reason, asset-owners are focusing in on companies’ disclosures on material ESG issues.
There is also the question of how investment organisations align their specific sustainable interests, and integrate these issues into their corporate policy. Outsourcing their voting policy can be a problem for asset-owners, who may believe that the areas they are passionate about are not always being adequately championed by their voting delegate.
The bottom line
For investors in the Asia region, the first priority is ensuring return. For example, sovereign wealth funds underlined that any sustainable investment must also earn a return above inflation. At LGIM, we believe through ESG integration, active ownership and long-term thematic analysis, responsible investing can not only mitigate risks, but also lead to better long-term financial outcomes – crucially, without sacrificing performance. As evidenced through the stated purpose of this international working group, sustainability is well-aligned with the mission of sovereign wealth funds, i.e. to provide for current and future generations.
A good kicking-off point for asset owners is this guide to climate change, which LGIM helped develop, or to have a look at our overall approach to ESG. More detail can be found here.
Last but not least, we were also asked, if LGIM had a wish-list for responsible investing, what would feature on it? Watch this space for our reply!