Temasek, GIC can lead in factoring ESG in investing
Temasek and GIC recently announced strong financial returns for the past year, with Temasek using a double-page advertorial in newspapers to provide details about how its investment practices help ensure solid returns and GIC pointing out how its returns provide a “worthwhile supplement to the budget” for the Government. Temasek also discussed how its community engagement initiatives such as Temasek Cares and T-Touch support thousands of people around the region.
Temasek and GIC recently announced strong financial returns for the past year, with Temasek using a double-page advertorial in newspapers to provide details about how its investment practices help ensure solid returns and GIC pointing out how its returns provide a “worthwhile supplement to the budget” for the Government. Temasek also discussed how its community engagement initiatives such as Temasek Cares and T-Touch support thousands of people around the region.
What neither Temasek nor GIC discussed in any detail, however, was how environmental, social and governance (ESG) factors affected their investment decisions and whether they supported better ESG performance in the companies they invest in.
Although Temasek states quite clearly on its website that ESG factors can have an impact on the long term sustainability of businesses, it stops short of saying how it takes these factors into account in its voting or other investment decisions.
GIC, on the other hand, has not publicly stated how or whether it considers ESG factors in investing.
That lack of information is a distinct contrast to sovereign wealth funds (SWFs) and government pension funds in some other countries, which proactively use ESG criteria to screen investments and openly say so.
GIC and Temasek, which many observers categorise as SWFs even though the latter simply says it is just an investment company, can both benefit from doing more on the ESG front.
THE CASE FOR ESG
Worldwide, SWFs have increasingly started to focus on ESG factors and even work to improve ESG at companies because of the positive impact it can have on financial returns as well as on society and the environment.
The United States-based Sovereign Wealth Fund Institute, for example, said ESG factors are gaining traction at SWFs, and pension fund giants such as California’s CalPERS expect investment managers to check for environmental analysis.
Institutional Investor reported in March that “as sovereign wealth fund assets surge, more investments are being screened for environmental, social and governance criteria”.
In Norway, the Norges Bank Investment Management (NBIM) organisation that manages the country’s SWFs disclosed that it had more than 2,600 meetings last year with companies’ management and voted in more than 10,500 shareholder meetings.
NBIM said its tools for active ownership include “dialogue with companies, voting at shareholder meetings and filing shareholder proposals”, and using its voting rights “to safeguard the fund’s assets”. These activities enable it to assess whether companies manage ESG factors appropriately so they can optimise their financial performance and let NBIM’s stakeholders know how it exercises its governance responsibilities
The decision by Norway’s Parliament in June to divest investments in coal firms due to global warming and financial risks showed how SWFs can both enhance their results and support policy change at the same time.
Government funds in other countries pursue similar goals. The New Zealand Superannuation Fund, which manages citizens’ pensions, says ESG factors are “material to long term returns” and balances them with avoiding “prejudice to New Zealand’s reputation in the world community”. Its website lists companies it excludes from its investments and has case studies of its engagement to improve ESG practices.
PGGM, a Dutch pension plan, similarly includes human rights in its screening for investments and excludes investments in companies that produce weapons. Along with disclosing the companies it excludes, PGGM said it is convinced that financial and social returns go hand-in-hand.
This emphasis on ESG factors also reflects their impact on financial performance. In a recent survey, for example, LGT Capital Partners and Mercer found that most institutional investors believe taking ESG practices into account improves risk-adjusted returns and a majority of institutional investors said they actively consider ESG criteria when making alternative investment allocations.
Attention from SWFs can also lead to policy changes at companies. When the New Zealand Superannuation Fund managers wrote to every company in the NZX 50 Index to encourage replies to Carbon Disclosure Project requests, for example, the response rate increased to 50 per cent from 38 per cent the year before.
It may well be that Temasek and GIC have already excluded or divested companies due to ESG risks. And it may be that they have exercised their shareholder rights in ways that reflect their values and policies.
However, information about what they actually have done so far has not been readily disclosed. The lack of information is a missed opportunity both to demonstrate how the organisations use their influence to improve returns or safeguard assets and to have the social or environmental impact that Temasek says it desires.
Along with achieving superior investment returns, Temasek and GIC have a tremendous opportunity to improve the results of the companies they invest in and have a broader impact on the investing community by discussing their practices related to environmental, social and governance factors.
Following best practices or even becoming leaders in disclosing their activities related to their ESG policies could enable Temasek and GIC to have even greater influence, let stakeholders know how they are managing ESG risk and further elevate Singapore’s position as a leading centre for investors.
ABOUT THE AUTHOR:
Richard Hartung is a financial consultant who has lived in Singapore since 1992.