Leading sustainable finance researcher has urged global investors to maintain a critical mindset when approaching an asset class’s green certification, saying that buying into sustainability claims blindly can undermine both the investment’s returns and the ultimate societal goal associated with it.  

Sumit Agarwal, Low Tuck Kwong Distinguished Professor and managing director of the Sustainable and Green Finance Institute at National University of Singapore (NUS), said while investors are keen to put money behind responsible assets, most know little about the implications of green certification. And real estate is one asset class at the epicenter of this problem.  

With a research interest in household sustainability, Agarwal led a study which examined the water consumption data for every apartment and commercial unit in Singapore between 2011 and 2020. His team also garnered the electricity consumption data for most residential buildings in Singapore.  

Around 55 per cent of Singapore’s buildings are certified under the nation’s Green Mark (GM) scheme – a rating system designed to evaluate a building’s environmental impact and performance – and the target is to increase that to 80 per cent by 2030.  

However, Agarwal’s team found that, worryingly, the household utility consumption level actually increases 3.3 per cent after the building’s green certification. He told Top1000funds.com’s Fiduciary Investors Symposium that the phenomenon could be caused by a wealth effect.  

“What is driving the result is because after the building goes through this Green Mark certification process… the unit apartment price goes up by on average 2 per cent.” he told the delegates in Singapore.  

And because renters don’t benefit from the property price increase, their energy consumption does not increase like homeowners in these buildings.  

This discrepancy between the GM’s intended usage and its actual implications can lead to unintentional greenwashing for investments, Agarwal said.  

“Unless we fix this kind of loophole, we are actually misleading the investors, and we’re misleading the regulators in the value of this Green Mark certification process,” he said. 

“When we uncover this kind of problems – unless we address them – these assets will be valued down.” 

He added that the broader Asian region has much more work to do on the standardization and awareness of sustainable investments compared to Europe and North America.  

For example, as of March 2023, there are over 5391 investors and service providers globally that have signed up as UN PRI Signatories – a pledge for organizations to publicly demonstrate their commitment to responsible investments.  

Among them, 1076 are US signatories and 858 are from the UK, while China only has 136 signatories, 123 in Japan, and 262 in the rest of Asia. This is not to mention the absence of countries such as India and Indonesia, Agarwal said.  

“One reason is most of these countries don’t even want to address this [problem]. If you ask where India is on net zero, India says we will only try to address that by 2070. If you ask China, they will say 2060, while countries like Japan and Korea are saying 2050,” he said.  

“There is huge variation in Asia on what countries put their priorities on. Because they are saying it’s not lives, but livelihood, that we care about right now. 

“Livelihood is more important right now for us to grow – to reach that point where we can think about sustainability as a key focus.” 

Regarding suggestions that wealthier countries may have to subsidize developing regions when it comes to solving climate change issues, Agarwal said organizations such as the World Bank’s International Finance Corporation are already working with the private sector to develop bonds used to finance relevant areas. But there are also risks in this solution. 

“Think about Indonesia – the country has relied quite a lot on coal. These coal contracts have been written for the next 30, 40 years and these assets will be stranded if we don’t finance them. 

“People have not been thinking about the legal actions the owners of these mines will take against the country and against the financial institutions if you strand these assets. 

“We have to be mindful of the legal aspect when we’re pushing [the subsidy] hard.” 

The specific drivers of growth for Asian economies means a traditional view of asset allocation is not necessarily the best way to approach investing in the region, the 2024 Top100funds.com Fiduciary Investors Symposium in Singapore has heard.

GIC senior vice president, total portfolio policy and allocation, Grace Qiu told the symposium that the backward-looking nature of benchmarks means that they may not necessarily be the best guides when assessing the potential of developing markets or regions.

Qiu said investors on the ground can often make better decisions.

“Benchmarks may be the best simple and transparent rule-based solution you can come up with in a single asset class. But in a total portfolio context, some of these important decisions can be made by ourselves.”

“As investors, we know the investment objective, the time horizon, and the risk tolerance. So, we should potentially take those decisions in-house, and make the right allocation accordingly.”

Qiu said that in emerging markets “the benchmark may potentially be even worse than…in developed markets”.

“Because [the benchmarks] are backward-looking, they’re not really reflective of the true [reason] why we allocate or invest in emerging markets,” she said.

“For us, making more granular decisions on not just the asset class, but also regional allocation, in a consistent manner across the total portfolio is an important task for asset allocation.”

Pictet Asset Management senior investment manager, multi asset Andy Wong agreed that asset allocations based on benchmarks are by definition backward-looking.

“Your variance, covariance matrices [are] mostly backward-looking,” Wong said. “Also, it is quite arbitrarily confined. People say the US economy is doing well, you should buy S&P 500. Actually, half of the revenue is from overseas.”

Wong said he has “a strong view that the semiconductor is the foundation of modern technology”, and being located close to supply chains for major manufacturers provides a useful perspective.

“Understanding some of the bottlenecks, understanding some of where the new technology is going to will help us think about where the world actually globally will be heading next,” Wong said.

Wong said investors shouldn’t use today’s use-case – which might be reflected in current benchmarks – to try to assess the investment potential of technology.

“When Apple was at $200 billion market cap, people were saying that even if every phone in the world is an Apple phone, they were overvalued. At $2.6 trillion today, quite clearly, it’s more than just a phone call machine; it is connectivity, it’s ecosystem, it’s productivity, it’s GPS, iPod, everything in one. All of these things we couldn’t imagine from before.”

Wong said asset allocation needs to be “a little bit more nuanced”.

“You need to look at fundamental drivers,” he said. “If you want to understand risk, you need to understand equities. If you want to understand equities, you need to understand US equities, which is 70 per cent of the market now.

“And then you need to understand Magnificent Seven, you need to understand AI, you need to understand semiconductor. So, from our perspective, themes and ideas are an integral part of asset allocation.”

Senior managing director, chief investment strategist and head of Singapore, AIMCo (Singapore) Kevin Bong said that from a portfolio construction perspective “diversification benefits; differing sector compositions; different stages in the economic and market development cycle; differing political, economic, and policy cycles; they all mean that the investment markets will not be perfectly in sync with what is I think, typically a developed market-heavy portfolio, and most of us have”.

“You could argue that some of it is an unfortunate side effect of slowing or a reversal of globalisation,” Bong said.“But I suppose if the markets give you lemons, you make a lemonade portfolio.”

Bong said that it is “admittedly more aspirational than a reality, but there is always alpha potential in new markets”.

“One could argue that active management opportunities are attractive across the Asia Pacific region, in part because the markets are not as efficient for the most part, but also because there’s meaningful dispersion in the region,” Bong said.

“All of that sums up to a picture where, especially for where we’re starting from Asia is an attractive opportunity.”

Qiu said asset allocation “needs to adapt to the new environment, to the new regime; and under the new environment asset allocation we believe at least, should be more flexible, more deliberate, and more granular.

“What is the next frontier? What is the newest area of innovation in asset allocation that we can think of to actually bring our portfolio to the next step?

“Those activities lie in some of the maybe more traditionally called bottom-up or more granular type of activities that doesn’t necessarily fall into traditional asset allocation mandate or asset allocation job description.”

Growth in prosperity and wealth across Asia isn’t a foregone conclusion and will only be a result of deliberate decisions and choices by policymakers and companies, the 2024 Top1000funds.com Fiduciary Investors Symposium has heard.

Future Fund director of research and insights Craig Thorburn told the symposium in Singapore that Asia’s destiny won’t happen by chance.

“One of my favourite quotes is: ‘Destiny is not a matter of chance; it’s a matter of choice[1]’,” Thorburn said.

“Asia’s destiny is not just going to be driven by its demographic pyramid. It’s also defined by the policy choices that the various leaders of these very different countries are going to be making. That is crucially important.”

Thorburn said the success of Singapore has come about through choice.

“When you look at potentially the success of India, and I would argue the last 10 years is a very good example of that, it has been done through successful incremental choice,” he said.

“When you look at what’s happened with China in recent years…part of that has been a matter of choice when it comes to the policy choices that the regime has put in place when it comes to its entrepreneurial society.”

Thorburn said investors should always bear this in mind when considering underlying fundamental issues such as demographics.

“You should have a bias towards deploying more to [Asia], but  my one advice is always remember that…quote about destiny: it’s a matter of choice, not a matter of chance,” Thorburn said.

Thorburn said the $A212 billion Australian sovereign wealth fund currently has about 30 per cent of its total portfolio invested in Asia, which includes Australian exposure because “I do consider Australia as Asia” but does not include Russia because “we don’t own Russia”.

“I do believe that all of us should have a bias in our thinking around how do we look towards increasing our Asian exposure.

Constrained by the universe

Hong Kong Monetary Authority chief investment officer of asset allocation Joe Cheung agreed that “the future is Asia” but noted that as things currently stand, institutional investors are constrained by the investable universe.

“Currently, Asia still has much smaller market cap in the listed market side,” Cheung said. “And if we want to invest more in in Asia, now we have to make quite an active decision to overweight Asia.

“I’m sure, over time, the market cap of Asia will grow mainly through all the new listings, for example, in the public market; and also through more investments available in the private market,

“But currently, it is still quite a small proportion in our portfolio. And it’s very hard to make a conscious decision to overweight, to allocate more to Asia, because that’s an active decision that we are accountable for.”

Cheung said investors are entering a new regime where a recent focus on risk will be replaced by a closer focus on returns.

He said that between 2009 and 2020 the cash rate in the US was close to zero and no more than 1 per cent in 10 of those 12 years. He said this dragged down the whole yield curve.

“If you look at bond yields, in those 12 years the average, say, 10-year yield was something like 2.3 per cent, while inflation was close to 2 per cent,” he said.

“For most institutional investors [with], say, a typical 60/40 total portfolio, a lot of money is tied up in safe assets – government bonds, and so on. If you look at a large part of your portfolio not being to earn a real rate of return, of course you worry, and you would make some changes to deal with that.

“We take on more risk, right? So that’s the easiest way we can handle that low interest rate regime.”

Taking on more risk

Cheung said that in fact that’s what institutional investors did, with some analysis suggesting fixed income exposures were cut on average by as much as 15 per cent, equity exposures increased by 5 per cent, and exposures to alternatives including private equity increased by as much as 10 per cent.

Cheung said investors also employed strategies such as risk parity, which involved leveraging bond exposures and some equity exposures to increase returns.

In a regime where institutional investors have been increasing risk, and using some sort of leverage in order to earn a return, the focus naturally has been on returns.

“In the coming regime, most of us would agree that the level interest rate is not going to go back to near zero for a while,” Cheung said. “So for us, at least, we are earning a real return on our safe assets. And in that sense, the focus going forward will be back on risk rather than on return.”

Cheung said this would cause investors to rethink leverage-based strategies “because the cost of funding is no longer low”.

“And also [they] will revisit whether it makes sense for them to have more equity,” he said.

“That’s the biggest thing we are thinking about in terms of the changing regime, because of the changes in the level of interest rates.”

Thorburn said that in the past 18 months the A$212 billion ($144.3) Australian sovereign wealth fund has reallocated about A$70 billion of assets, with about $A7 of that reallocation away from hedge funds and towards mostly investment-grade credit.

“The reason for that is quite simple: we’re being paid for it,” he said. “For a long time, we haven’t been paid for that, and we haven’t seen conditions as attractive as this probably since the GFC. For us, it was a bit of a no-brainer to deploy into it.”

Thorburn said the decision to allocate away from hedge funds was driven by a desire to simplify the portfolio.

“We actually really like hedge funds – always have, always will,” he said.

“But they do add complexity to your portfolio, and in a world where you’re not quite sure – is it supposed to zig or is it going to zag? – you probably want to reduce that level of complexity in your portfolio. And that’s what we did.”

Thorburn said the fund didn’t have the luxury of reducing its bond allocation because it is already very low.

“Our bond exposure is done through derivatives,” he said. “We do have bond exposure, but it’s quite small in the general scheme of things. We also didn’t want to reduce our equity exposure, because we have a very aggressive risk target that we have to hit: Australian CPI plus 400 to 450 basis points is an aggressive target.

“If we’re going to reduce [equity exposure] even more, and it’s less than what some of you in this room would have, we need to be very careful if we’re going to make that decision.”

[1] “Destiny is not a matter of chance; it is a matter of choice. It is not a thing to be waited for, it is a thing to be achieved.”
– William Jennings Bryan (1860 – 1925)
https://www.pbs.org/wgbh/americanexperience/features/wilson-william-jennings-bryan/

 

Working out which companies have a viable transition path to net zero is a complex task for investors. When it comes to figuring out how a company will get there and how their transition will be financed, more investors are making a distinction between emissions that are hard to abate, and emissions that are expensive to abate. 

 As a growing number of investors make net-zero pledges, they are not only faced with the job of setting a strategy to achieve that goal, but they’re also faced with answering some fundamental questions about the companies and businesses they invest in, and what it really means to implement a net-zero strategy in practice. 

The 2024 Fiduciary Investors Symposium in Singapore last week heard that it’s not a simple task to assess a company’s potential transition to net zero, the technology that might be required to support it, and the role of asset managers in financing the transition. 

Norges Bank Investment Management global head of active ownership Wilhelm Mohn (pictured) said investors can’t just focus on companies in a portfolio that are leaders or laggards on transitioning to net zero, “it’s everything in between”. 

“A lot of these sectors, as you can guess, are those hard-to-abate sectors, and we expect the transition to be a transition over the next 20 years,” he said. 

However, he said that the $1.5 trillion asset owner is now thinking “less about ‘hard to abate’ and more about ‘expensive to abate’” emissions. 

“In terms of most of these sectors, the technology and the solutions are there,” Mohn said. “It’s more how you essentially finance it, and how we also as investors can be supportive for long-term decision making.” 

Bridgewater co-chief investment officer, sustainability, Carsten Stendevad, said the “hard or expensive” perspective is “a very, very insightful way of putting it”. 

Stendevad said Bridgewater research suggests that around 40 per cent of current emissions can be abated using existing technology. 

“We have the technologies, we have even sometimes mature technologies, we just have to implement them at scale,” he said. “It will, of course, require capital, but it will require, I would say, ‘normal’ risk capital. 

“Then you have the remaining 60 per cent of emission reductions, where the technology is not quite there yet, either because, literally, we don’t have the technology, or because it just hasn’t been proven at scale, or…it’s too expensive. And so, this needs a different type of capital.” 

Stendevad said green capital and venture capital is attracted to this type of opportunity, but “the amounts that are needed are so big, and the risks are still quite significant that that’s really the part of the system that is the hardest to make work”. 

Stendevad said that making informed decisions on whether a company is doing what it said it would do to transition to net zero, or whether it can even do it, is “such an important question”. 

“The starting point must be a fundamental understanding of how a company is related to real-world emissions, whether that be its operations, its energy consumption, its supply chain, its products – in other words, really a comprehensive understanding of scope, one, two, and three [emissions],” Stendevad said. 

He said companies fall into three buckets: low-emitters; climate problem solvers; and high-emitters. 

He said low emitters do still need to reduce emissions but can do that mostly by switching to renewable energy sources. He said about half of global equity market capitalisation is made up of low-emitting companies. 

“So you can kind of think of them as not really part of the problem, not really part of the solution,” Stendevad said. 

Climate solution companies are those whose products and services – either accidentally or by design – mitigate climate change. 

“That could be, of course, green energy producers; it could be EVs; it could be green tech; and that represents something like 5 per cent of market cap,” Stendevad said. 

The remaining companies – close to half the capitalisation of global equity markets – are high emitters, and “this is where the problem is,” he said. “The big question here is, are these high-emitting companies transitioning, or are they not? That’s very much the epicentre of the challenge. 

“The whole challenge of net zero is to figure out which of these companies have a credible way of…transitioning their business model.” 

Stendevad said Bridgewater’s analysis suggests high-emitting companies that have a credible path to net zero account for about 20 per cent of global market capitalisation – in other words, about half the current population of high-emitting companies has a credible path to net zero, and the other half does not. 

Stendevad said investors need to answer fundamental questions before making any decisions to back a company’s net-zero transition plan: is it technically feasible, is it financially feasible, does the company even want to change, and what are its achievements to date? 

As much as 40 per cent of global emissions are created by the real estate sector, and Cbus chief executive Kristian Fok said members of his fund – which has its origins in the Australian construction and building industries – work in a sector “that has a huge contribution to carbon, but also has a huge potential to contribute to the reduction in carbon”. 

Fok said that as a member of the Materials and Embodied Carbon Leaders Alliance (MECLA), Cbus is looking at “the components that will go into reducing the carbon footprint in terms of the buildings that you construct”. 

“It’s how do we stimulate green steel? How do we stimulate zero emission concrete? How do we think about design, timbers, and things like that. 

“In a sense the easy bit’s done, which is the trying to make it net zero from an operations point of view. We now need to tackle the harder bits. But the value becomes in the tenants and now moving to saying, OK, it’s not just the operating footprint, it’s actually the footprint of the development that we’re going in. So there’s sort of a race to the top.” 

Fok said the fund is aiming to put its money where its mouth is and one of its current commercial property developments is aiming for a level of embodied carbon 30 per cent below the current benchmark.  

“From a cost point of view it’s quite interesting, because it is more costly to construct,” Fok said. On the other hand, because it’s an attractive building to work in because of its environmental credentials, lease incentives paid to tenants are lower. 

“The other thing is that we’re able to issue green bonds,” Fok said. “We just recently issued a billion dollars of green bonds against the portfolio, and they’re a lower cost of finance. So, we’re seeing the whole ecosystem continue to evolve to try and encourage that innovation.” 

Assessing the potential path to net zero and its impact on a company is complex enough even where a manager has made an active decision to invest. But for an asset owner like NBIM, which by virtue of its sheer scale owns about 1.5 per cent of the world’s total equities, the task is immeasurably more complicated. 

Mohn said even though the bank is “a largely passive investor, and largely invested everywhere forever” it has an active program of engaging with companies it invests in. 

“It’s probably the most important thing we can do, it’s most important from a standards development point of view,” he said. 

“That’s how you get, you can call it, sustainability beta, if you will. We target a 3 per cent real return for the portfolio, and that’s how you get it on the long-term. We believe we have an inherent interest in sustainable development.” 

Mohn says “it’s really important to start with that piece of the puzzle, and then it comes to the companies and that’s very different, it’s very different game”. 

“We have to prioritize,” he said. “We think about the exposure, the companies, and then think about the actual management of it, and then the performance. Based on that, you can [rank companies].” 

Mohn said that for net-zero targets in particular, NBIM has developed a Climate Action Plan that sets “an ambition for our companies to have operations aligned with net zero by 2050”. 

“That means having targets by 2040,” he said. “For high emitters we expect them to set targets already. And we’ve prioritized our top 70 per cent of financed emissions, some 250 companies, those direct emissions, scope one and scope, two; and then the most important indirect emitters, that’s essentially bank and automotives, for more in depth dialogues where we are really seeking to not just ask the questions around governance and policies, but also understand the details of their long-term transition strategies.” 

Mohn says NBIM has produced a document setting out its expectations on climate change, covering a range of sustainability topics and available publicly.  

“But what we did with the expectations on climate this year is that we changed it quite significantly towards something that is very useful for a consistent and long-term dialogue with the company as it transitions,” Mohn said. 

He said NBIM has some foundational expectations around board accountability and governance, setting targets and working in a science-based manner to assess timeliness of interim targets. 

“And then we break it down [into steps]: where you start, and how as you go through essentially transitioning, and that’s worked out really, really well in company dialogues, and really allows us to pick and mix and match the level of maturity of the company,” he said. 

 

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Director of FSSA Investment Managers Vinay Agarwal has warned investors against drawing comparisons between China and India just because the two have similar market sizes and populations. And despite India’s sky-high valuations, Agarwal argued that the country’s solid market structure and culture will make it worth investors’ while.  

FSSA is a part of Mitsubishi UFJ-owned First Sentier Investors and Agarwal’s merit includes Indian Subcontinent strategy and Asia-Pacific equities investments in general.  

He told the Top1000funds.com Fiduciary Investors Symposium in Singapore that from an equity perspective, many people considered India now to be where China was 20 years ago, but one of the most important differences is their level of resilience.  

“China has been on such a massive, positive run for decades now that the companies there have not gone through a prolonged tough period, whereas in India, it’s always two steps forward one step back,” he told the crowd.  

Indian companies had to negotiate with conditions such as complex requirements from close to 30 state governments and lack of infrastructure. But most importantly, there is limited access to capital, whereas Chinese companies get to enjoy readily available state-directed capital.  

“Capital consciousness is far higher,” he said. 

“Our engagement with these [Indian] companies is always about composition, remuneration, succession, quality of financials – all those things that help us establish whether something is quality or not…which is in most cases is lacking in China.” 

Worth the price? 

The MSCI India Index traded at 22 times price to earnings this week, which is ‘nosebleed valuations’, according to Anuj Girotra from the $500 billion Canadian pension investor CPP Investments. 

About $5 billion of the fund’s $20 billion Asian active equities strategy is allocated to India, which Girotra oversees. The market-neutral, pure-alpha portfolio focuses on public equities, PIPE deals and pre-IPO opportunities in the consumer, healthcare, financials and technology domains, which Girotra said is a level of flexibility needed to invest in India.  

L-R: Anuj Girotra, Colin Tate, Ben Weiss, and Vinay Agarwal

“India is still a relatively shallow market, you can’t build a very deep business if you’re only doing publics or only doing privates,” he said. 

Girotra encouraged investors who think the Indian markets are too expensive to look at valuations from another perspective.  

Despite having more than 5000 listed companies in the country, he said after applying some reasonable market cap, liquidity and return on equity thresholds, in the past 10 to 15 years most growth equity investors around the world have probably been chasing only 20 companies.  

“And a ton of capital foreign capital has been coming into India, which explains why most of us anecdotally believe India is very expensive,” he said.  

Agarwal said India’s valuations, despite being substantial, are worth it. He added that its companies’ earnings are also less lofty compared to those in China, for example. 

“When you look at the earnings of Chinese companies, easily 20 to 25 per cent of the profits are subsidies, which are given by provincial governments or central governments,” he said.  

“When you take that out, the earnings will be a lot lower, and the premium will be a lot higher when you’re comparing China to India.” 

Growth ahead 

Looking ahead, the next event bound to have an enormous market impact is the imminent Indian general election, according to geopolitical consultant and Veracity Worldwide managing director Ben Weiss. 

The ruling BJP party’s confidence in maintaining its position means that the policy and regulatory environment will likely stay on the same trajectory as the past decade, which is not a bad thing, Weiss said. 

“The stock market in India during that period of time basically tracked the US stock market. At the moment, they are showing 8 per cent GDP growth,” he said.  

“One thing that has marked the BJP’s time in power under Prime Minister Modi has been significant easing of business, both on the financial investment side and certainly on the corporate side. You see a lot of red tape go away.” 

There are also many government efforts done to bolster the economy and infrastructure, he said, including a ₹7 trillion ($84 billion) rail project in the latest budget. 

India’s tension with China is “not unspoken of” as a rationale for investment into the country, he said, and it has created many initiatives in Western countries such as the U.S.-India Critical and Emerging Technologies Initiative (iCET). 

However, Weiss warned investors might want to be wary of India’s “democratic backsliding” over the last 10 years.  

“The BJP has taken a very heavy hand when it comes to things like controlling media and the flow of funds to NGOs that happened to be critical of his government. 

“There’s some questions around the independence of some of the courts, so still a number of real issues.”