ESG (Environmental, Social and Governance) investing is a hot topic these days. The growing practice of investing in exclusively eco-friendly, socially-conscious companies is a developing industry, and from the sounds of the panelists at the FIA Asia-V panel, “Responding to Societal Issues” Wednesday, it’s still got a lot of growing to do.
The panelists said that each of their companies had seen increased demand for ESG products, especially from clients in the U.S. and Europe. Mathieu Fuhrmann, vice president of equity index sales at Eurex, said that Eurex’s clients asked the exchange to build out an ESG marketplace in the European Union beginning with benchmark ESG indices, launching ESG derivatives products later to meet customer demand. Pascal Lambert, group country head of Singapore and head of South East Asia & India at Societe Generale, said that investor appetite for ESG products has particularly increased among prime bankers and family offices over the past 18 months.
The panel’s moderator, Yvonne Zhang, director of risk advisory for Deloitte, asked why this investment trend has grown. Michael Tang, head of listing policy and product admission Singapore Exchange Regulation at SGX RegCo, said that demand is likely driven in large part by growing public concern about the effects of climate change. “While many see climate change as an environmental issue, it also creates a social issue,” he said. He explained that since climate change leads to rising sea levels, and many urban centers in Asia – as well as in the U.S. and Europe – are situated near large bodies of water, rising sea levels pose a threat to the people who live in such cities. Concern for such things, he said, are a driving force behind demand for investment options that exclude companies that are major contributors to climate change.
Kate Simpson, vice president of global clearing at J.P. Morgan, said that “societal pressure” for ESG products is different for each generation. She said millennial investors in particular look for “meaning” in their investments, and that this is becoming increasingly important because it allows firms to “differentiate themselves.”
Even as customer demand for ESG products increases, many investment firms are hesitant to increase exposure to the global ESG markets, which are still developing in some key ways. Zhang said that the ESG markets still face considerable uncertainty with regulation, which is hampered by a lack of standardization. Fuhrmann said Eurex’s launch of its Euro STOXX ESG indices was an attempt to serve that need. He also said that although finding reliable market data in the ESG space has gotten easier in the past year, it remains a challenge because of how it is disseminated. “A lot of data is driven specifically at the ‘E’ [in ‘ESG’],” making it harder to find products for customers who, for example, are more concerned with the “S” in “ESG,” meaning they are interested in companies that engage in socially conscious business practices.
Lambert said that although SocGen will gradually “reduce our exposure to the financing of oil,” getting into the ESG space, such as the fragmented carbon market, is tricky right now. “It’s not easy…[I’m] scratching my head as to how we can step in.” Tang was more optimistic, saying that he had seen growing consensus for standards and practices in the ESG space. “As an exchange, we don’t set standards, but we do look towards what is building up consensus within listed companies…on the standards to adopt,” he said. He said that exchanges could potentially be drivers of wider adoption of these standards in the future. “I think this is a platform where exchanges as enablers of change…really can leverage the power of finance.”