GREAT EXPECTATIONS: ESG - WHAT’S NEXT FOR ASSET …€¦ · Source: Q1 Great Expectations -...

GREAT EXPECTATIONS: ESG - WHAT’S NEXT FOR ASSET OWNERS AND MANAGERS BNP PARIBAS GLOBAL ESG SURVEY

MADHU GAYER

Singapore, July 2017

Asia Pacific institutional investors are

increasingly adopting Environmental,

Social and Corporate Governance

(ESG) related strategies.

Key messages

Great expectations:

ESG - what’s next for asset owners and managers 2

The BNP Paribas survey

has found that 84% of

APAC institutional investors

surveyed currently

incorporate ESG into their

investment decision making,

compared with 82% in

Europe, and only 70% for

North America.

While a fifth of APAC

institutional investors

currently market a

majority of their funds as

ESG, more than 60% are

expected to do so within

two years (see section 2).

Demand in APAC is

broadly aligned across

both asset managers and

asset owners, driving

change.

However, availability of

robust data is seen as the

major barrier to further

adoption of ESG currently

while analytical

capabilities is seen as the

major issue tomorrow.

SURVEY BACKGROUND

1

3

High level demographics

4

44

19 10

26

21

2 13

APAC Countries

Australia

China

Hong Kong

India

Japan

Malaysia

Singapore

Great expectations:

ESG - what’s next for asset owners and managers

High level findings

5

Regional View

Respondent Type View

INCORPORATE ESG IN DECISION MAKING BOARD DISCUSS AS ISSUE OF IMPORTANCE HAS ESG POLICY AS PART OF STRATEGY

79% 82% 84% 70%

0%

20%

40%

60%

80%

100%

Europe APAC North Am

67% 70% 76%

57%

0%

20%

40%

60%

80%

100%


68% 68% 78%

59%

0%

20%

40%

60%

80%

100%


INCORPORATE ESG IN DECISION MAKING BOARD DISCUSS AS ISSUE OF IMPORTANCE HAS ESG POLICY AS PART OF STRATEGY

ASSET MANAGERS

ASSET OWNERS

80%

77%

69%

65%

69%

67%

Source: Q1 Great Expectations - What’s Next for Asset Owners and Managers

How are investors investing in ESG

6

Global ESG landscape

CANADA

22.0%

2014 2016

$6,572 $8,723

UNITED STATES

15.2%

2014 2016

$729 $1,086

EUROPE

5.7%

2014 2016

$10,775

$12,040

JAPAN

724% ASIA EX. JAPAN

7.6%

$45

$52

2014 2016

$7

2014 2016

$474

AUSTRALIA / NZ

2014 2016

$148 $516

At present, the largest markets for sustainable

investing in Asia, excluding Japan, are:

Malaysia (30%)

Hong Kong (26%)

South Korea (14%)

China (14%). BREAKDOWN OF SRI ASSETS

Europe 53%

United States 38%

Canada 5%

Australia/NZ 2%

Asia ex Japan

0% Japan 2%

Global CAGR: 11.9%

Note: Asset values are expressed in billions

Source: 2016 Global Sustainable Investment Review, GSIA

How are investors implementing ESG

7

GLOBAL FIGURES

ASIA EX JAPAN

0 2000 4000 6000 8000 10000 12000 14000 16000

Impact investing

Sustainanbility themed investing

Positive / best-in-class screening

Norms-based screening

Engagement

Integration

Negative / exclusionary screening

2016

2014

+57%

+55%

+8%

+19%

+19%

+17%

+12%

CA

GR

16.55

23.41

1.16 1.73 2.09 0 0

0

10

20

30

2014

2016

Investors are increasingly

seeing ESG as a core part

of their investment

decision making – both in

terms of analysing risk and

identifying opportunities –

for example, investing in

green bonds.

Integration has overtaken

divestment in Asia ex

Japan

Note: Asset values are expressed in billions

Source: 2016 Global Sustainable Investment Review, GSIA

APAC GAINS MOMENTUM ON ESG

2

8

APAC accelerating ESG take up

9

PROPORTION OF FUNDS THAT ARE ESG NOW AND IN TWO YEARS (MEAN SCORE)

31%

28%

34%

34%

51%

42%

57%

54%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Two years Today

+21%

+23%

+14%

+19%

Pro

jecte

d E

SG

Gro

wth

Europe

APAC

North Am


Key messages

10

APAC INVESTORS ARE MORE LIKELY TO INCORPORATE ESG FACTORS AND TO COMMIT TO HIGHER PROPORTION OF ESG FUNDS

50

55

60

65

70

75

80

85

90

25 26 27 28 29 30 31 32 33 34 35

Pro

po

rtio

n in

corp

ora

ting

ES

G in

th

eir d

ecis

ion m

akin

g

Proportion of funds that are ESG currently

Europe

Total

Total

APAC


ESG allocation to shift to alternatives in the next two years

11

TOTAL

APAC

47% 33% 36%

29% 19% 22% 16% 19% 16% 21%

34% 28% 34% 23% 28% 22% 20% 19%

Developedmarkets

Emergingmarkets

Domesticincome

Internationalincome

Hedge fund Private equity Private debt Real estate Infrastructure

0%

10%

20%

30%

40%

50%

Now (darker colour)

In Two Years (lighter colour)

-55%

33% 30% 27% 17% 15% 19% 15% 11% 13% 17%

28% 19%

30% 20% 21% 19% 16% 19%

Developedmarkets

Emergingmarkets

Domesticincome

Internationalincome

Hedge fund Private equity Private debt Real estate Infrastructure

0%

10%

20%

30%

40%

50%

Now (darker colour)

In Two Years (lighter colour)+76%

Alternative asset classes are becoming increasingly ‘ESG aware’ – for example, we are seeing private equity firms ensuring they

can achieve a timely and quick exit from an investment and are incorporating these factors when structuring their investments

Public equities Fixed Income Alternatives – avg. increase of 22%

Public equities Fixed Income Alternatives – avg. increase of 32%


APAC barriers to ESG

12

BARRIERS TO GREATER ADOPTION OF ESG: TODAY

Gathering data can be complex – relying on quantitative and publicly available data. A shortage of data to support ESG has

seen skepticism persist within some senior management ranks, which is limiting its adoption across the region, and globally

more generally.

However, smart data, artificial intelligence and ESG specialists will play a key role in helping to break down these barriers in

the next few years

52% 61% 53%

25% 25% 25%

18% 11% 19%

15% 17% 12%

14% 9% 9%

8% 9% 12%

6% 4% 6%


6%

9%

11%

15%

16%

25%

55% Lack of availability of robust data

Not a priority for senior management

Concern over costs

Limited ability to create ESG-themed

products

Lack of conviction that ESG will improve

performance

Lack of advanced analytical tools/skills

(external)

Lack of advanced analytical tools/skills

(internal)

APAC institutional investors

are confident they will

overcome this challenge

though as in two years, only

9% expect data to remain

a barrier to further ESG

incorporation.


APAC investors – capabilities and AO-AM alignment

13

ESG TOOLS/CAPABILITIES AND AO LEVEL OF SATISFACTION WITH AM (TOP 2 BOX)

APAC boasts the

highest level of

asset owner

satisfaction with

the level of ESG

reporting they

receive from their

asset managers

(69%).

Nearly two thirds

of APAC investors

(64%) believe their

ESG tools are

industry leading –

likely a critical

factor in bolstering

enthusiasm

towards ESG.

3%

5%

3%

2%

8%

11%

4%

9%

33%

38%

30%

30%

38%

32%

45%

39%

17%

14%

19%

20%

1 We lack the tools 2 3 4 5 - Our tools are industry leading

68%

69%

60%

65%

AO satisfaction

North Am D

APAC C

Europe B

A

Tools and capabilities


KEY GLOBAL FINDINGS

3

14

How are investors currently deploying ESG

Great expectations:


WHAT ARE YOU CURRENTLY DOING (ASSET OWNERS) OR OFFERING (ASSET MANAGERS)?

Both institutional and retail investors are demanding greater consideration of and disclosure around ESG issues and climate

change in particular is a very high profile topic and one that directly affects millions of people around the world

AOs and AMs are increasingly seeing ESG as a core part of their investment decision making – both in terms of analysing

risk and identifying opportunities – for example, investing in green bonds

50%

62%

39% 36%

25%

54% 51%

40%

30%

13%

Investing in sustainableinvestment opportunities

Investing in companiesbased on their ESG profiles

Active ownership Conducting negativescreening

Benchmarking fundsagainst an ESG benchmark

Asset manager : (A) Asset owner : (B)

Majority see policymakers with a stronger role to play but are

not sure that regulation is needed

Great expectations:


POLICYMAKERS WILL INCREASE THEIR ESG REQUIREMENTS REGULATION ON ESG IS NOT NECESSARY

A

B

C

D

A

B

C

D

Europe

APAC

North Am

Europe

APAC

North Am

21%

23%

22%

17%

39%

39%

40%

36%

31%

28%

32%

34%

Don’t know 1 - Strongly disagree

2 - Disagree 3 - Neither agree nor disagree

4 - Agree 5 - Strongly agree

8%

13%

10%

4%

6%

6%

10%

4%

20%

16%

19%

24%

42%

41%

33%

48%

16%

19%

24%

11%

7%

6%

5%

9%

Don’t know 1 - Strongly disagree

2 - Disagree 3 - Neither agree nor disagree

4 - Agree 5 - Strongly agree

Institutional investors plan to double investment in ESG

strategies over next two years

17

PROPORTION OF FUNDS THAT ARE ESG NOW AND IN TWO YEARS

ASSET MANAGERS

ASSET OWNERS

31%

32%

31%

51%

52%

50%

Two years Today

APAC 57%

+19%

+20%

+20%

Pro

jec

ted

ES

G G

row

th

Source: Q18Great Expectations - What’s Next for Asset Owners and Managers

The E in ESG takes centre stage

18

This result shows organisations are planning ahead to future legislation and the transition to a low-carbon economy

However, the perceived difficulty of analysing social factors may be affecting perceptions of the “S” component’s

potential influence on returns. We believe that the potential benefits of this pillar are greatly underestimated

ASSET MANAGERS ASSET OWNERS

45% 36% The difficulty of incorporating social is

seen to over-ride the potential for returns,

particularly among asset managers


All regions struggle to create relevant ESG products

19

STRENGTHS AND WEAKNESSES (TOP 3 BOX)

Capability to keep pace with ESG reporting requirements

Adequacy of ESG policies

Ability to create relevant ESG products

Ability to adapt to changes in legislation

Adequacy of resources

Ability to measure ESG impact

49% 43% 53% 52%

44% 39% 45% 52%

23% 22% 25% 24%

52% 46% 52% 59%

47% 37% 51% 56%

49% 44% 47% 57%



Overcoming the data challenge

20

BARRIERS TO GREATER ADOPTION OF ESG: TODAY

9%

16%

6%

11%

15%

25%

55% Lack of robust data

Not a priority for senior

management

Limited ability to meet the

product needs of asset

owners

Lack of belief that ESG will

improve long-term gains

Lack of advanced analytical

tools/skills (internal)

Concern over costs required


tools/skills (external)

ASSET OWNERS ASSET MANAGERS

Lack of data is a major

barrier at the moment,

particularly for asset

owners

Asset managers are

concerned about limited

ability to meet asset

owner needs

Lack of analytical tools

and concerns over costs

is a minor barrier currently

for both managers and

owners

47% 64%

26% 25%

28% NA

10% 13%

NA 11%

15% 17%

14% 5%


But data is today’s problem, analytics tomorrow’s challenge

21

BARRIERS TO GREATER ADOPTION OF ESG: TODAY AND IN TWO YEARS

6%

9%

11%

15%

16%

25%

55%

6%

6%

10%

15%

10%

25%

63%

Leader Group Total

There remains a lack of consensus as to all the relevant ESG factors, while gathering data can be complex – relying on quantitative and publicly

available data

However, the industry is solving this with new standards and definitions

To overcome the analysis issue, companies will need to seek technological solutions using things like AI and smart data. ESG specialists will also

need to be recruited

Lack of robust data

Not a priority for senior

management

Concern over costs required

Limited ability to meet the

product needs of asset owners

Lack of belief that ESG will

improve long-term gains


tools/skills (external)


tools/skills (internal)

Barriers Today

Barriers In two years (diff.)

Total

-40%

-2%

+11%

0%

+5%

+14%

+6%

-49%

-8%

+18%

-6%

+6%

+19%

+11%


What asset owners seek from their asset managers

22

IMPORTANCE OF ATTRIBUTES IN ASSET MANAGER SELECTION

ESG research capability

ESG values are aligned to ours

Dedicated ESG investment team

Competitive fees / costs

Clear investment processes relating to ESG

ESG brand and reputation

Performance track record

ESG reporting capability

Good communication between the two groups is going to be increasingly critical to align the right products

with the right organisations

11%

14%

22%

25%

28%

35%

38%

38%

15%

15%

24%

36%

25%

32%

41%

37%

Asset manager Asset owner


BNP PARIBAS SECURITIES SERVICES AND ESG

4

23

Our commitment to ESG

WE ARE COMMITTED ACROSS THREE KEY DIMENSIONS

1st global custodian as a signatory of the UN PRI

14 workstream global programme chaired by global head of CIB

150 people across the CIB business

ESG Reporting as a dedicated workstream, sponsored by BPSS

global CEO

Global Sustainable

Finance Programme

Data: continuous improvement programme focused on increase and

enhancement in data sets, across asset classes and within ESG

pillars

Solutions: integration into multi-asset risk, ESG attribution

R&D: climate change stress tests, green / shariah bond premia,

carbon footprinting, ESG-aware beta

ESGRA Roadmap

(2016-17)

ESG Made Simple Guide (working with the UK PLSA, the Dutch pension

industry)

Carbon stress testing paper published

Partnered on the 2016 UNEP “Investor Obligations & Duties in 6 Asian

Markets” report

Hosted 10 roundtables / seminars globally in 2016 on ESG

Flagship Sustainable Finance Forum in Singapore 2016 & 2017

Thought Leadership &

Research

24

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