INVESTING using an ESG (environmental, social, governance) lens has become a standard in investment management today. Last year, however, UOB Asset Management (UOBAM) became the first Asean fund management firm to be shortlisted for the Principles for Responsible Investment (PRI) ESG Incorporation Innovation Initiative of the Year Award. Wealth editor Genevieve Cua speaks to Victor Wong, head of sustainability office for UOBAM.
What does sustainable investing mean for UOBAM and why is this important?
While the concept of ESG investment is becoming mainstream, many asset managers in Asia are still at an early stage of offering sustainable investment solutions. UOBAM has taken the opportunity to become one of the first regional asset management firms to join the PRI, allowing our investors to invest for profit with purpose.
As an active manager, I have a fiduciary duty to allocate capital into more sustainable investments and be an active owner. With the growing awareness of sustainability in Asia, strong commitment from governments to promote sustainability as well as strong economic growth in the region, ESG considerations are becoming increasingly material to investors.
To address this growing trend, we have made sustainability a key strategic pillar and offer a wide range of ESG investment strategies. These range from relatively straightforward strategies like negative and exclusionary screening, to ESG integration or thematic investing. These are enabled by our regional ESG research capabilities and the use of artificial intelligence and machine learning (AI-ML) to enhance our investment process.
The firm has a “man + machine’’ framework for sustainability assessments on companies. How does this work and to what extent would this approach enhance risk management and support alpha generation?
A NEWSLETTER FOR YOU
ESG Insights
An exclusive weekly report on the latest environmental, social and governance issues.
We have developed an innovative approach to ESG investing in South-east Asia that is anchored on a concept of “man and machine”, combining investment technology with fundamental research. Using the AI-ML ESG model, we generate our own ESG data and reports for real-time tracking of controversies. We also have ESG analysts in our regional offices to conduct research and assessment and deepen local engagement with our portfolio companies. This information is shared across the regional offices to help identify good investment opportunities.
For example, our Sustainable Asia Top-50 Fund invests in up to 50 top corporations in Asia. Companies are selected based on strong ESG performance and fundamentals, and their long-term growth potential. The man-and-machine approach has allowed us to improve our coverage of nearly 400 additional companies on top of our initial coverage in South-east Asia.
An internal backtesting analysis also found a positive relationship between our ESG ratings and market performance. Using an A to D rating scale, we found A-rated companies (representing the highest ESG standards) together with strong fundamentals registered higher returns with lower volatility and lower maximum drawdowns.
A-rated companies outperformed D-rated companies in terms of risk-adjusted returns for the backtesting period of 2019-2021, suggesting that risk-taking is offset by superior performance and ESG rating.
What are the challenges in accessing sustainability data for Asian companies?
While there is increased interest in ESG investing, the biggest challenges in sustainability data are the availability, reliability and comparability of data. I describe this challenge as data being “too little yet too much”.
Availability and reliability of ESG data remain challenges as companies and asset managers navigate through a confusing landscape of disclosure frameworks, data collection methods and external assessments that vary across South-east Asian regulators. Third-party data providers generally cover larger companies but there is limited coverage of securities regionally, especially of smaller and newly listed companies. For instance, some large data providers have zero coverage of the Vietnam HCM Index.
Comparability of data is also a challenge. Even when data is available, there are too many data providers that collect data based on different approaches – some may not necessarily align with an asset manager’s approach. There is lack of standardisation of sustainability metrics and a lack of harmonisation to measure ESG factors. This challenge is present both within industries, and among companies in the same industry, due to the differing quality and approach of company disclosures. We overcome this challenge by leveraging our regional expertise to conduct on-the-ground research.
Eventually data coverage will improve, but there are investment opportunities that asset managers can explore now.
What role does engagement play in your sustainability efforts?
Engagement efforts are relatively nascent among asset managers regionally, but I am convinced that we can make a positive impact. This can be done by enhancing risk-adjusted returns in the long run, driving positive change among companies and improving their sustainability performance.
Our engagement strategy involves conducting assessments to identify potential material thematic ESG issues that can affect our investee companies in the long run.
Regionally, key engagement issues include moving away from thermal coal, harvesting palm oil sustainably, and labour issues and they differ across countries. Our analysts will select material issues in their respective countries and engage investee companies. This allows us to gain insights into how they approach relevant ESG issues and collect crucial data.
For example, in Malaysia, we achieved tangible results with an investee company in the utility sector. It was looking to move away from operating coal-powered plants towards investing in renewable energy-related business. Working together, we set non-binding mutually agreed monitoring milestones.
As a result of the company’s progress in achieving these milestones, we upgraded its ESG rating, and also invested in it. The company’s share price also rose in tandem as investors recognised its improvement in ESG.
Keyword added to your list