Wealth Management
Northern Trust Asset Management’s sustainable strategies
Building resilient, revenue-generating portfolios for Asian investors
2 Aug 2021 | The Asset

The adoption of sustainable investing is skyrocketing, driven by global investor sentiment that environmental, social and governance (ESG) data and analytics can add to investment performance. Inflow into sustainable investing funds, according to Morningstar data, was just shy of US$2 trillion, about 79% of which was from Europe, a little under 12% from US assets, and less than 1% (0.85%) originated from Canada, Australasia, Japan and broader Asia.

However, in the Asia-Pacific region, the demand for ESG solutions is undeniably becoming more popular, especially with numerous governments and their financial regulators set on promoting sustainable investing, says Benze Lam, head of Asia, ex-Japan, Northern Trust Asset Management, who cites, as examples from among many in the region, the Monetary Authority of Singapore’s US$2 billion green investment programme and the Financial Services Commission of South Korea’s series of ESG and responsible investing initiatives.

In Asia-Pacific, ESG assets under management (AUM) in the institutional space have grown on average more than 30% per annum over the last five years, according to data from Broadridge, mainly due to the strong inflows seen in 2020. “For Northern Trust Asset Management in Asia-Pacific, its ESG AUM has grown more than 60% in the last three years, while more than 65% of our assets contain some ESG element,” Lam points out. “And ESG investing in Asia is expected to continue its strong growth momentum over the next five years, with regions like China, Hong Kong, Singapore and South Korea leading.”

However, for most Asian institutional investors their sustainability journeys are still in their early adoption phase. Some investors, like sovereign wealth funds and public pension funds in the region, have started their journeys by excluding controversial business lines like tobacco or gambling, or by adopting passive investment strategies that track ESG indices. Investors further down the pathway to ESG integration have set quantifiable targets, like reducing their carbon exposure.


How are Asian investors approaching ESG investing?

“Our flagship ESG strategy includes exclusionary, integration and thematic approaches to ESG in the construction of portfolios,” Lam explains. “The strategy combines exclusions with targeting best-in-class companies to have ESG uplift, reduce carbon exposure and integrate ESG in a multi-dimensional way.”

In the intermediary market, Lam notes that local asset managers with limited experience in sustainable investing are looking for global asset managers as potential partners to help them gain the knowledge and insight needed to create ESG solutions that meet their investors’ objectives and deliver exceptional client experiences.

Risks and opportunities

In spite of the growing number of tools and capabilities that investors have today to facilitate sustainability across passive, active and quantitative investment capabilities, investor concern focuses on risk. “Our investment thesis is that the long-term health of the market is tied to a healthy global environment, a society of stable workforces, and well-functioning, well-governed companies,” details Emily Lawrence, director, sustainable investment, client engagement, Northern Trust Asset Management. “Certainly, the Covid-19 pandemic has illustrated the linkages between the health of the global society and that of global financial markets. Increasingly, investor thinking has moved, beyond the historic way of viewing sustainable investing as a means of just aligning investments with values or ethical codes towards one of seeing it as an opportunity to build more resilient portfolios.”

Climate-change risk, and the subsequent challenge to build countervailing resilient portfolios, open up many compelling opportunities that are poised to grow. “Emerging markets have been lagging behind developed markets in terms of their climate-risk controls, ESG frameworks and acceptance of ESG investing,” Lam offers. “These current disparities are where we see potential investment opportunities. For ESG-leading companies already operating in emerging markets, we see strong potential for growth as policy-makers catch up with regulations and ESG frameworks.”

The pandemic is also forcing this process from both the regulatory and investor perspectives. “Climate risk will soon transition into market risk, most likely resulting in the considerable repricing of securities,” Lam warns. “Taking Northern Trust Asset Management’s green transition strategy as an example, we aim to cut current and potential exposure to carbon emissions while minimizing exposure to carbon-related risks by excluding high-risk carbon-intensive companies and hedging climate risks by maximizing exposure to companies deriving revenue from green activities.”


Finding opportunities and performance in ESG investing

As part of this strategy, Lam admits that clients will have to disclose their carbon exposure information, and, to facilitate this, Northern Trust Asset Management has developed comprehensive reports that monitor carbon reserves and track for potential carbon emissions in portfolios.

Yet, while many of the long-term climate-change risks are often discussed, and there are numerous market capabilities focused on long-term value creation, there are many near- or mid-term risks associated with mismanaging material ESG issues, something clearly demonstrated, again, by the recent pandemic, when many companies struggled to adapt quickly to human capital, employee health, safety and well-being, and topics like cybersecurity.

“Those are topics we are focusing on this year as part of our engagement priorities, which aim to seek out ways to minimize those sorts of risks in the portfolio,” Lawrence states. “From our perspective, sustainable investing does not automatically entail a compromise on performance. The focus here must be on running due diligence and identifying a strategy that aligns investors’ targeted performance objectives with their values.” 

“A well-designed ESG strategy can help manage risks around climate change, data security and governance issues, control sector deviation and stock-specific risks, and produce a more resilient portfolio,” Lam confirms, which was demonstrated during the H1 2020 sell-off when ESG portfolios performed better overall relative to non-ESG peers.

“The pairing of risk premia factors like quality with ESG is also important as this helps identify companies with longer-term planning around ESG risks while maintaining financial health and delivering profitable results,” he explains. “This means potentially excess returns in the long run.”


ESG: What matters and how to measure it

“With over US$130 billion of AUM in sustainable strategies globally, and over 30 years’ experience constructing investing solutions for many of the world’s most sophisticated investors, we at Northern Trust Asset Management have the necessary experience,” Lam states. “We welcome the opportunity to help Asian investors understand more about sustainable investing solutions and support them as they plan their own ESG investment journey.”

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