The implementation of an ESG framework in an investment strategy can produce significantly improved returns and assist in the management of volatility.
A global survey of 475 institutions conducted by State Street Global Advisors shows asset owners from Asia Pacific are integrating ESG strategies to enhance investment performance, with 70% of respondents from the region seeing improved returns and 74% using ESG screens to mitigate instability.
SSGA head of global ESG business Chris McKnett said there's a collective shift in the institutional investment world causing asset owners and managers to think differently about the consequences of investments.
"For the majority, the question is no longer 'should we consider ESG as part of our mandate,' the question is 'how are we actively pursuing opportunities with our investments that help us reach our financial goals, while encouraging change in the process?'" McKnett said.
According to the study, Asia Pacific investors are trailblazing when it comes to including active ownership as part of a complete ESG strategy; 80% have some level of ESG engagement with their investments, compared to 70% in the United States and 58% across Europe, the Middle East and Africa.
"There's a broader appreciation of the notion that good governance translates into better management of areas such as a company's carbon footprint, as well as how management engages with the workforce. The companies that operate this way, we believe, are better quality investments that yield better performance long term," SSGA head of ESG investments and asset stewardship Rakhi Kumar said.
However, further analysis shows 19% of APAC investors have more than 50% exposure to ESG factors in portfolios and 43% have less than 25% exposure. Respondents attributed this to a variety of factors, including cost, limited demand from stakeholders, unclear value proposition, and lack of knowledge and capability. Globally, 50% said it's difficult to benchmark performance against peers.
Despite this, 90% of APAC investors surveyed said they aspire to integrate a fuller ESG strategy over the next two years - one that goes beyond negative screening. Globally, 80% of respondents have already incorporated an ESG component with their investment strategies, though just 27% are fully integrated.
SSGA head of investments APAC Kevin Anderson said the results are exciting, given the positive governance outcomes created.
"As more investors appreciate that their financial return objectives can sit comfortably alongside encouraging positive change through promoting ESG factors in their investments, we would expect the overall percentage of ESG exposed assets to increase," Anderson said.