Asian environmental equities spread their wings
A longstanding Asian markets strategy that has a strong environmental and ethical focus does not feel the need to market itself as ESG as this is fast becoming mainstream
Amidst the increasing awareness among investors about environmental, social and governance (ESG) investing, there is one asset class that has been growing steadily but quietly, thus, providing more options for ESG investors.
This is the "Asian environmental equities", an asset class in the equity space that consist of listed companies domiciled in Asean, Australia, Greater China, India, Japan, and Korea. Previously, almost all environmental equities were either European or US companies.
Companies classified as "Asian environmental equities" generate at least 20% of their revenue by providing products and solutions involving clean air, clean water, clean energy, reducing energy consumption, producing sustainable food, and reducing food wastage, according to David Li, senior portfolio manager, director and lead manager of the Impax Asian Environmental Markets Fund. He is also the lead analyst for Asian environmental equities of Impax Asset Management.
The universe of Asian environmental equities has increased to about 600 companies at present from about 350 in 2009 based on the research conducted by Impax.
Asian environmental equities cover companies that are focusing on or contributing to sustainability either in the form of new technology, more efficiency, and innovation related to ESG.
"Companies are addressing the environmental issues that are happening and expanding the universe for Asian environmental equities. In the field of electrical vehicle development, for example, companies that are developing battery technology, electrical management, and charging infrastructure are good examples of Asian environmental equities," says Li.
Unlike similar strategies, the Impax Asian environmental markets strategy has a longer track record having been launched in November 2009, pre-dating the trend towards sustainable investment. The strategy has US$230 million in assets under management (AUM), according to its Q4 2018 fact sheet.
"It is a long-only fund with a bottom up stock selection strategy. We find these companies by visiting them, doing valuation, and we do an ESG review. They have to have solutions to environmental problems, but we also look at their operations, whether what they do internally is efficient in terms of social consequences and governance. We also look at the structure of the board, behaviour of the earners, the managers, the remuneration policies, how do they deal with minority shareholders," Li says.
Li explains that Impax does not market the Asian environmental markets strategy as an ESG fund saying: "First, in the past there was no such thing when it first started. Second, from our perspective, eventually every fund will have incorporated ESG anyway."
He adds, "So I feel that ESG is part and parcel of investing ultimately. Everybody would have some sort of ESG analysis. It's how they incorporate it. Is it an isolated bucket sitting in a corner? Which is not the way to do it. It has to be integrated into your investment process and I think ultimately everybody will have to do that."
Although the strategy does not allocate by sector but picks stocks individually, in terms of asset allocation it is invested in energy efficiency (43%), pollution control (23%), waste management and technologies (11%), water infrastructure and technologies (10%), renewable and alternative energy (6%), food and agriculture (5%), and cash (2%), according to its Q4 2018 fact sheet.
In terms of geographic exposure, its largest asset allocation is to Hong Kong and China (36%), followed by Japan (20%), Taiwan (13%), South Korea (10%), India (9%), Australia (4%), as well as 2% each to Philippines, Thailand, US, and cash.
Impax has incorporated ESG into its overall investment strategy. Impax has a total of US$12 billion in AUM.
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