Over 200 asset owners, investors,thought leaders and corporatescame together at ResponsibleInvestor’s RI Asia 2013 conferencein Singapore this March.

The conference opened with anaddress by Magnus Böcker, CEO ofthe Singapore Exchange (SGX), whohighlighted the growing importance ofsustainable investment in today’seconomy. Global markets, he pointedout, have undergone a dramaticchange for the worse in a very shortperiod of time, and against thisbackdrop, calls for sustainableinvestment are much louder than theywere pre-crisis. Today, about US$13trillion of professionally managed assetsincorporate ESG principles, withEurope accounting for 65 percent ofthe amount. Asia currently accounts foronly 0.6%.

However, it is still early days in Asianmarkets, said Böcker. Sustainabilitydisclosure, he believes, will beincreasingly important in the future forcapital markets.

“In due time, we will see much moreinterest, even from the retail investors inthis part of the world, for corporates todemonstrate much more sustainabilitythan today.”

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RI Asia 2013:the investor-corporate ESG summit 19-20 March 2013 | SGX Auditorium | Singapore

Conference Report

page 2

Dr Danyelle Guyatt, InvestmentManager for Catholic Super, theAUS$4.4bn supernnuation fund, saidthat sustainable investment requires along term view in all aspects. She listedareas that asset owners need toaddress: asset allocation should focuson tangible assets such asinfrastructure rather than on financialassets, manager selection shouldfavour those with a long-termperspective and short-term tradingshould be avoided. “Short term doesnot add any value. It leads to the stockmarkets following emotion and rumourrather than fundamentals,” sheobserved. The need to focus on thelong term was a recurring themethroughout subsequent discussions.

Gordon Hagart, Head of ESG RiskManagement with the AUS$95bnAustralian Government Future Fund,quipped that having one client and nomembers makes it much easier to take along-term view. “One of the fundamentaltenets of responsible investment is thatthe asset owner at the top of the chain isa key player,” he said, pointing out thatwhen an institutional asset owner has aclient behind it, the asset owner will besusceptible to the client’s time horizonand behavioural traps. Ideally, he said,asset owners would think of theirportfolios not as a bagful of individualassets but as an interconnected whole.However, that requires a very strong CIOwho can communicate to the assetmanagement team that the benefits of aninvestment are socialised somewhereelse in the portfolio.

Anne-Maree O’Connor, Manager,Responsible Investment, for theNZ$22bn New ZealandSuperannuation Fund, said that withresponsible investment, there is thequestion of what kind of informationasset managers need, and this can bean issue in Asia. “In the Asia Pacificregion, you don’t want compliancework to look like you don’t trust yourmanager,” she pointed out. On theother hand, she said, the weighting ofresponsible investment in managers’conviction reviews can be a tool forencouraging sustainable behaviour.

“Short term does not add any value”

Asset owners should take a long-term view

page 3

Koji Terunuma, Section Chief of theWelfare Policy Division at RENGO, theJapanese trades union whose affiliatedpension plans account for almost halfof the schemes in Japan’s corporatepensions sector, or more than JPY50trillion (€450bn), described how thetrade union confederation hascommitted itself to incorporating non-financial factors such as ESG into theinvestment decision making processand exercise of shareholders’ rightsinvestment. Unions, he said, have thisresponsibility because they exercise asubstantial influence on companies andsociety through the management ofworkers’ capital, and the investmentsthey make also have the potential toaffect workers themselves.

RENGO is attempting to convince othermajor bodies to do the same bydeveloping sample guidelines forresponsible investment. As a result, hesaid, the public servants’ union – oneof the biggest unions in Japan – hasdeveloped its own responsibleinvestment policies. However, most ofRENGO’s other affiliates have notcommitted to responsible investment,and the movement has not yet reacheda stage where the unions can demandpro-active behaviour from investmentmanagers. The issue, he said, is thatresponsible investment is still notpopular with the rest of the country.

Lisa Woll, Chief Executive of US SIF,the Forum for Sustainable andResponsible Investment, listed twotrends in sustainable investing,particularly in the US. Firstly, a growingnumber of funds are coming

into the sustainable investing spacebecause they find that its relevanceis increasing. “There is a growinginterest in the space fromconventional large financialinstitutions. These are notinstitutions that have historicallytaken part in sustainable investing,”she said.The second trend is divestment of non-sustainable sectors as a strategy.Currently in the US, she said, there areongoing campaigns to get universityendowment funds to divest from fossilfuels, as well as calls for divestmentfrom guns.

Giuseppe van der Helm, Presidentof Eurosif (the European SustainableInvestment Forum), pointed out thatregulation is now the second mostimportant driver of sustainablebehaviour, from being the leastimportant. However, he said that itcan also be a hindrance tosustainable investment, citing theexample of the Netherlands, where itis considered wiser to invest inderivatives rather than sustainableplantations. “If you want to besustainable, you need to do yourresearch,” he explained. “Butunfortunately, asset owners are notalways willing to set aside the neededmoney and knowledge.”

Jessica Robinson, General Managerfor ASrIA, the Association forSustainable & Responsible Investmentin Asia, said that governments aremoving towards the creation of moresupportive policy frameworks for

responsible investment, driven largelyby environmental crises. At the sametime, financial innovation is becomingmore widespread, especially in Asia.However, she pointed out that Asia isstill behind the curve in this area:“Investors in Asia are really strugglingwith the concept of ESG andsustainable investment.”

Responsibleinvesting needs amajor player tolead the way

Global trends in sustainable investing

Responsible investmentis still not popular with

the rest of Japan

“Investors in Asia arereally struggling with the

concept of ESG andsustainable investment.”

page 4

Christopher Nolan, AssociateDirector, Advisory Service, BSR, saidthat delays in oil and gas or miningprojects are more often caused bysocial and governance issues than bytechnical issues. As an example, hecited a client that was running a miningproject in Papua New Guinea someyears ago. This client was technicallyvery sound, he said, but its social andenvironmental standards were veryweak due to a lack of expertise andresources at the front end. By the endof the first year, the project had run intosignificant delays due to environmentalconcerns and opposition from the localcommunity, and the company lost aconsiderable amount of money as aresult. “Companies must recognise thatthese are immensely complicatedprojects, and even when they do theright things, delays will still oftenhappen,” he observed.

Rick Bennett, Chairman of GMIRatings, said that ESG issues affectAsian companies no differently fromWestern companies. He cited figuresshowing that between 2005 and 2012,the portfolios with the highest SRratings outperformed their counterpartsby 94% in Asia ex-Japan. In NorthAmerica, the difference was 123%, andin Western Europe, it was 74%.

Frances Liu, ESG Specialist, GreaterChina, Bloomberg, pointed out thatpoor corporate governance is afinancial risk. She cited companies suchas Sino Forest, Olympus and ShanghaiPharmaceuticals, all of which saw theirstock prices plunge after reports offraud and poor governance surfaced.Conversely, she said, an analysis ofcompanies listed on the ShanghaiStock Exchange shows that goodcorporate governance is correlated tobetter financial perfomance.

poor corporategovernance is a financial risk

Vipul Arora, Founder and Director ofSolaron Sustainability Services,described corporate governance as a“driver of drivers”. In India, he said,companies that are global or planningto go global, listed offshore or haveraised foreign capital tend to performwell in ESG areas, and are alsoextremely careful about their ratings. Healso listed examples of how ESG issueshave affected companies in other Asiancountries. “A CEO behind bars or abusiness losing its license to operate –obviously these things are going to havea real impact,” he noted. He advisedthat investors can protect themselvesby communicating with stakeholdersand finding out what is happening onthe ground. If there is a disconnect –what he calls the “hypocrisy quotient” –that is the first red flag. “It’s a very goodearly warning sign of where thecompany’s going,” he said.

“delays in oil and gas or mining projects

are more often caused by social and

governance issues thanby technical issues”

The potential risks and returns of ESG performance

page 5

Julian Poulter, Executive Director atAsset Owners Disclosure Project, saidthat climate change is possibly thebiggest risk that asset owners canface: “For any class of assets, we thinkthat maybe 50-55% of the portfolio isat risk in some way. It’s not insurable,it’s not avoidable, it’s not furtherdiversifiable.” The only way toeffectively hedge it, he said, is to investin lower carbon assets as a returnsacrifice. On the other hand, hepointed out that there is now a drivetowards greater transparency asinvestors begin to question how suchfundamental risks are managed.“Hopefully, civil society can use todemand that asset owners take alonger term position on behalf of thebeneficiaries,” he said.

climate changeis possibly the biggestrisk that asset owners

can face

Charles Yonts, Head of SustainableResearch at CLSA Asia-PacificMarkets, also pointed out that theshort-term view is incompatible withESG goals. The average time frame forreturns, he said, is three months, butESG time frames may be three years orlonger. On the other hand, he wasoptimistic about the change ingovernments’ and businesses’attitudes towards ESG risks. CitingChina, he pointed out that rules whichhave been enacted but ignored for along time are now being enforced, notleast because problems with air andwater pollution have become too greatto disregard. “Risks that have beenesoteric are now becoming verytangible and should be worked intoearnings models,” he said.

the short-term view is incompatible with

ESG goals

Chaoni Huang, Head of BusinessDevelopment, Asia, Trucost, elaboratedon pollution as a major issue in China.“The public anger is there, and thegovernment is under a lot of pressureto turn this around and stabilisesociety,” she said. The need for greatercontrol from an environmentalperspective, she said, has affected howbanks carry out their loan andinvestment activities, and the way inwhich they price externalities.

Antigone Theodorou, Director, HongKong and Southeast Asia, CDP, saidthat disclosure is increasing within theAsian region, but that greaterregulation may also lead to higherreporting costs. However, she pointedout, greenhouse emissions will be akey source of carbon-related risks andopportunities for businesses. Theseinclude the potential to generatecarbon credits and derive growth fromlow-carbon projects, which areexpected to create benefits equivalentto their risks.

disclosure is increasingwithin the Asian region

Environmental issues in Asia

Dr Peiyuan Guo, General Manager ofSynTao, China, said that China currentlyfaces four issues that will affect itsdevelopment over the next few years.These are the increasing cost of labour,food safety, guanxi and social media. InChina, he explained, guanxi is so highlyconnected to corruption that the termcarries many negative connotations.Meanwhile, social media is leading togreater transparency. For example, hesaid, companies such as Baidu andWeibo have emerged to replaceblocked Western providers, and justlast year, information revealed on Weibocaused the downfall of severalgovernment officials who had behavedinappropriately. “This will be a veryimportant issue in the next few years,”he said.

Rebecca Lewis, Investment Analystwith Arisaig Partners, said that rising taxrates in developed markets have spilledover to affect emerging markets. In orderto bypass tax limits, multinationalcompanies are increasing the brandroyalty fees they charge theirsubsidiaries, with the result thatincreasingly larger amounts of money arebeing moved out of emerging markets.

“From a social perspective, we thinkthat profits should stay in the marketswhere they were earned,” she said.Finance ministers in developedeconomies, she added, are trying tomoderate the situation, but ultimately itcomes down to local implementation,which is poor in emerging markets.

we think that profitsshould stay in the marketswhere they were earned

Jaideep Singh Panwar, Manager withSustainalytics, listed out the socialissues his company is currentlyfocusing on. These include food safetyin China, worker safety in theelectronics industry, pharmaceuticalspricing and access pressures in Asia,and the issue of palm oil producersentering frontier markets. This last, hesaid, creates a “whole new set of risks”because of the size and time frame ofthe investments involved, and thedubious track record many of thesecompanies have in community relationsin their own markets.

Emily Chew, Senior Analyst withMSCI, China, said that investors havenot been taking up opportunitiesrelated to social issues because of thedifficulty of navigating this particulararena. At the same time, push forcessuch as regulatory issues, litigation andindustry restructuring have beenmaking these investments lessattractive in the short term. However,she pointed out, underserved marketsrepresent openings for companies thatspecialise in the products theseproducts need. “There are independentpull forces that are incentivisingcompanies to change their businessmodel,” she observed.

There are independent pull forces that are

incentivising companiesto change their business model

page 6

Social issues in developing markets

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Sachin Joshi, Director of the CII-ITCCentre of Excellence for SustainableDevelopment, Confederation of IndianIndustry (CII), shared his organization’sdevelopment of the CorporateSustainability Label as a market tool forcompanies to communicate theircorporate sustainability performance tostakeholders. The label, he said, isseen as an opportunity by Indiancompanies, especially the leadingcompanies, which are “very, very goodin terms of sustainability”.He also described top-down initiativesby the government and the regulator.The regulator, he said, has require thetop 100 companies listed on thenational stock exchanges to report ontheir business responsibility beginningthe financial year that ends on 31March. And the Indian government hasbecome the first government in theworld to legislate CSR spending forcompanies, a move that places suchexpenses in the financial statementsrather than under donations orphilanthropic expenditure. “It puts thecompany in the public space,” he said.“They would have to be very clearabout why they are spending thatamount and what it achieves.”

James Gifford, Executive Director forthe United Nations-backed Principlesfor Responsible Investment, said thatthe case for responsible investment ismaking itself clear as sustainabilityissues increasingly begin to affectconsumers’ lives directly. However, hesaid, the financial sector still is notfactoring the economic value ofsustainability into its analyses.“Companies are willing to give upeconomic value for the sake of shortterm earnings. They would rather havelower returns sooner than higherreturn later,” he pointed out. “It’simpossible to have a sustainableeconomy with that kind of behaviour.”To align human incentives with thelong term horizon, he said, responsibleinvestment has to be redefined as aholistic solution for running theeconomy: “We need to reframe thisconversation and this argument. It’snot only about convincing theskeptics, it’s about finding the peoplewho are aligned with this argumentand empowering them.”

Sustainablebehaviour as amarket tool

Demonstrating the case for responsibleinvestment

the Indian governmenthas become the first

government in the worldto legislate CSR spending

for companies

It’s not only aboutconvincing the skeptics,it’s about finding the

people who are alignedwith this argument and

empowering them

page 8

Clarence Yang, Head of CorporateGovernance Asia ex-Japan atBlackRock, said that fund managersand analysts can influence companiesby directing their investments andasking “awkward questions” on aregular basis. As an example, hedescribed BlackRock’s tools forexamining quantitative data andsumming it up in a format that can beeasily understood and manipulated.Fund analysts, he said, can then usethe data in a manner that will impactinvestment decisions, such as valuing astock according to how it scores inESG areas. “The goal is to take thistype of thinking, make it mainstreamand make it one of the things a goodinvestor will look at to make aninformed decision,” he said.

A single company canonly do so much but weare much stronger if weteam up with othercompanies around us

Stephan Schablinski, DirectorSustainable Supply Chain Solutions,DHL Supply Chain, Asia Pacific, saidthat living responsibly is the centre ofDHL’s business strategy for attractingtalent, business and investors. “It ispart of our cost strategy to understandour impact on the environment and tomanage these risks pro-actively,” heexplained. Moving forward, he said,there is a need for companies in theindustry to team up and collectivelyengage consumers, investors and thegovernment. “A single company canonly do so much, but we are muchstronger if we team up with othercompanies around us,” he said.

the legal system in Asiadoes not lend itself tovoluntary changes

Charles Lee, Research Director, NorthAsia, Managing Editor, ACGA RegionalBriefing, Asian Corporate GovernanceAssociation, said that the legal systemin Asia does not lend itself to voluntarychanges in corporate governancepractices. “Most global CG bestpractices are based on US and UKcommon law, systems and jurisdiction,which are absent in North Asia.” heexplained. “It’s very top-down; forexample, if you want to change boardstructure to increase the number ofdirectors, you have to amend companylaw, which requires parliamentaryapproval.” For corporates in Asia tochange, therefore, he said thatgovernments and regulators have totake the lead. One method that hasworked in South Korea, he said, is tohave the national pension service pushfor governance through its voting rights.

Esther An, Head of CSR and GeneralManager (Corporate Affairs), CityDevelopments Limited, shared howCDL became a role model forsustainability in the Singapore realestate development sector. She listedseveral factors that allowed CDL tofollow a sustainable path, includingstrong internal leadership, the scale toinfluence stakeholders and their supplychain, and the availability of advancedpre-fabrication methods in Singapore,which allowed better costmanagement. The business case fordoing so, she said, comes in the formof long term utility savings. Investors arealso demonstrating greater interest inCDL’s sustainability effort: “I feel thatthere is definitely stronger interest in oursustainability performance,” she said.

Creating change at Asian corporates

page 9

Wai-Shin Chan, Director, ClimateChange Strategy, Asia Pacific, HSBC,said that the environment is now a majorfocus in China. “We’re seeing littlestraws in the wind”, he described theChinese government’s moves to reducepollution one city or district at a time. Themost significant factor, he pointed out, isthat the government has admitted tohaving problems enforcing standards,largely because social media has made itnearly impossible to cover up suchissues. “They are monitoring the way theregulations are enforced. That has neverhappened before,” he observed. Inaddition, he said, the Chinesegovernment is taking steps to managestakeholder expectations by givingconsideration to local circumstances andopinion into consideration. “Will thegovernment succeed?” he asked.“That’s the big question.”

Jeanne Stampe, Asia Commoditiesand Finance Specialist, WWFInternational, said that the supply chainis the key to change, and that thesupply chain can in turn be controlled bybanks and investors. “They play a keysupporting role; they can set the rules ofthe game through ESG integration,” shesaid, adding that WWF has beenworking closely with banks over the lastfew years. In Asia, she elaborated, mostbanks are still focusing on their licenseto operate, with only a few global banksfollowing policies for high-risk sectorssuch as palm oil and forestry. However,for the banks to drive change, they mustreach a stage where ESG policies areintegrated directly into their dailyoperations. “We think it is imperative forthe banks to start developing their ESGstrategy and formulate their ESGframework,” she said.

Jillian Fransen, Director ofCitizenship, Barclays PLC, provided thebanks’ perspective with a descriptionof what she and her team are doing toeffect change in Barclays. She said thatthe change is driven from top-down,with CEO Antony Jenkins leading apush to reframe the bank’s values.Initiatives include making sustainabilitya part of each employee’s variable payby the end of 2014, and anenvironmental and social impact policywhich all project finance transactionsmust follow. “That’s the baseline welook at,” she said. “But our focus ismostly on emerging issues six monthsdown: where we are compromisingintegrity over profits, where should webe paring down and where should webe focusing our activities.”

Sustainability in climate change investing, bank lendingand project finance in Asia

page 10

Darius Sarshar, Director, New ForestsAsia (Singapore) Pte Ltd, said that theconversion of natural forests withoutcommercial standing timber volumeinto palm oil plantations is a marketfailure and has led to a misallocation ofcapital. To correct this, he said, naturalforest has to be monetised, which willdrive up the cost of converting thatland. This would, in turn, force anincrease in productivity per hectare, anemphasis on R&D and a shift todeveloping more degraded land withno forest cover. “We need to boostproductivity per hectare,” he said.

the conversion of naturalforests into palm oil

plantations is a marketfailure

“I don’t think there’sanything wrong withpalm oil; there’s a

hell of a lot wrong withthe way it’s grown”

Dr Simon Lord, Group Director forSustainability, New Britain Palm Oil,Ltd, said that it is imperative to breakthe link between palm oil anddeforestation. “I don’t think there’sanything wrong with palm oil; there’s ahell of a lot wrong with the way it’sgrown,” he said. There is, he explained,a productivity yield gap of up to 60% inthe palm oil industry, and investors arecontributing to this gap by simplifyingyield into land mass. “Yield governanceis composed of two parts: good ethicalpractice, which is about maximisingproduction without exhausting theenvironment, and best managementpractice, which is about minimisinglosses without exploiting the sociallandscape,” he said. “The fact is thatthe potential yield of oil palm has noteven been 50% exploited.”

Peter Heng, Managing Director ofGolden Agri Resources, described hiscompany’s sustainable policies, whichinclude zero-burning, not developingon peat and respecting the rights oflocal communities. GAR, he explained,is focusing on producing more oil fromless land and developing plantationsfrom degraded land rather than primaryforest. “We are mindful that conservingforest is beyond just GAR’s efforts,” he

said. “We need all our stakeholders tocome on board. Communities mustvalue high carbon stock, thegovernment needs to develop policiesand structures, and of course industryplayers have to agree to the schemes.”

Sundari Ramakrishna, ConservationDirector, WWF-Malaysia, brought upthe importance of certification. Citingthe RSPO certification, which shedescribed as the only internationallycredible multi-stakeholder certificationstandard for palm oil, she said: “It is themechanism by which many palm oilproducers can deliver yield increasesalongside environmental, social andcommunity benefits and avoid negativeimpacts.” WWF research onprofitability, she said, shows that thecertification process reduces the costof production, increases return oninvestment and most importantly,reduces conflicts with localcommunities. Like previous speakers,she also highlighted the need to helpsmallholders improve their capacitydevelopment. “We are all for yieldincrease, improvement andoptimisation,” she said, “provided it isdone in a sustainable manner.”

Optimising palm oil yield – a win-win for investors and forests

“We are all for yield increase,

improvement andoptimisation provided

it is done in asustainable manner”

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RI Asia 2013:the investor-corporate ESG summit 19-20 March 2013 | SGX Auditorium | Singapore