Stars have aligned this year for Environmental, Social and Governance (ESG) criteria investors as the pandemic and net zero carbon emission pledges mean companies are being more strongly held to account by regulators and investors, says Helena Fung, Head of Sustainable Investment APAC at FTSE Russell.

The Hong Kong-based ESG veteran says climate-aware companies have been “very visible” in 2020 with the complements of an oil rout and a decrease in the price of renewables giving more emphasis on companies that are able to provide those solutions.

“We have better solutions now that can take us towards low carbon and net zero goals. How this plays out in the medium term remains to be seen but all the stars are aligned here for the technology piece that we need in order to meet those solutions. There’s the political and global landscape, plus the asset prices and they’re all shifting in the right direction,’’ Fung says.

Fung says a number of countries came out this year, including China, Korea and Hong Kong with net zero pledges by 2050.

“In order to achieve that you will need that very virtuous cycle of companies, investors and regulators moving together in sync. As we move away from ESG as a risk management tool towards uncovering the companies that will provide the solutions we need for the longer term, … uncovering those companies will help to identify the shift in investment attitude,’’ she says.

Other shifts have occurred in the sector since Fung began with ESG in 2008 which cater for a broader base of stakeholders.

“It’s been a great broadening out and increased and enhanced awareness of many of the issues relating to ESG. Companies are being held that much more to account by regulators and investors,’’ Fung told Investment Magazine’s Market Narratives podcast.

“What we’ve seen is a very increased and strengthened dialogue not only with companies but also with the managers of funds to make sure they’re holding to account the companies in their portfolios and the management.

“And also looking very much at the material issues that are going to make a difference to companies both that have the potential to destroy value but also… responding to opportunities that are developing in the market,” she says.

A bottom-up approach from investors has converged with a top-down approach driven by regulators in both mature and developing ESG ecosystems, she says.

“I’m based in Hong Kong and the landscape is different across different regions. Australia is one of those mature markets like Europe and the US. You do see a bottom up propulsion in more mature markets. If you look at the early days of ethical investment… it also has its impacts in the way that governments and regulators think about these issues,’’ Fung says.

While focus has been on environmental elements of ESG it was important to look holistically.

“A lot of the companies that are becoming more heavily rated in sustainable portfolios, they may do well on the environmental piece but it doesn’t mean there are other issues that investors need to be aware of and engage on,’’ Fung says.

“Some of the social issues around employee relations and consumer responsibility and the newer risks – cyber security, privacy laws. These are going to be other issues that are more relevant to those sectors than others.”

“The one thing we haven’t mentioned is stewardship and it is incumbent on investors to maintain that dialogue. “

With the alignment of financial performance and ESG, Fung says there is still alpha to be found from sustainable investing.

“Ultimately, in terms of the question of alpha and ESG, there are two ways to look at this, bearing in mind the fiduciary duty of investors institutional and asset owners to maximise returns over a longer time frame. That piece doesn’t go away so obviously allocating to companies that enable and achieve those performance goals is important,’’ Fung says.

“The research so far, most investors would go with, is that ESG has at least a neutral effect or positive effect on returns so that’s probably the starting point.

“There is a very strong appetite to see how ESG can help to uncover alpha in portfolios and at the company level. So there is an appetite for understanding how companies are going to position themselves with regards to that opportunity set around ESG and looking for those companies that are better positioned.”

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