Cost of ESG is a growing challenge for some Asian fund managers

Local Asian asset managers are finding it harder to meet the rising costs of building out environmental, social and governance teams and complying with increasingly onerous sustainable investing policies that are putting a further squeeze on profit margins.

Asset owners in the region are increasingly requiring ESG capabilities as a “minimum requirement”, but trying to keep pace with large European and US fund firms is a growing challenge for smaller firms from the region.

Lion Global Investors is the largest Singapore-based fund house with S$71bn ($52.6bn) in assets under management as of the end of March, but it is still minuscule compared with the trillion-dollar global funds giants.

Chief executive Teo Joo Wah said that while low carbon and green energy are important considerations for Lion Global, “the truth is that it’s actually adding cost to me”.

This article was previously published by Ignites Asia, a title owned by the FT Group.

The challenge is that more institutional investors expect fund managers to have ESG processes and to have the capabilities to report on carbon emissions and other measures.

“There’s no running away — you will have to incur costs in terms of hiring more people, subscribing to databases, etc,” said Teo.

But those costs have been rising and have become harder to keep on top amid ongoing challenges in regional markets, which he describes as “quite a difficult period for Asian managers”.

“If you are an Asian fund manager specialising in Asian equities, I think the last five years have been very difficult,” Teo said.

Funds executives in Asia have noted that asset managers will have to “continue to spend more” on ESG as compliance burdens increase and the competition for talent, technology and data resources grows.

In Singapore, for example, the introduction of a code of conduct for ESG rating and data providers in December raised fresh concerns around how the regulation could potentially raise sustainable investing costs further for fund firms.

Mushtaq Kapasi, managing director and chief representative for Asia Pacific at the International Capital Market Association, noted at the Financial Times Future of Asset Management Asia Conference earlier this month that Asian asset managers struggle with data acquisition and methodology.

Smaller fund companies may not have enough resources to collect data all the way down the value chain, Kapasi said.

As a result, few Asian asset managers are actually embracing sustainability as a “core business value”, he added.

Lion Global’s Teo, who took over the reins at the manager at the end of 2022 replacing longtime CEO Gerard Lee, said European fund firm rivals, especially, have had a head start in building out ESG capabilities.

This means that Lion Global’s investment in ESG is mostly about keeping existing clients onboard as opposed to being able to win new mandates, according to Teo.

“Can I go and get more clients because of my ESG? Not really because I can’t say I’m at the forefront,” he said.

Teo said he was uncertain whether Lion Global should aim to grow its sustainable investing resources to the level of European firms.

“I’m not quite sure whether the incremental costs will enable me to get the incremental revenue to make it worth the while,” he said.

Regional fund managers are at risk of losing market share to global fund firms due to their laggard ESG capabilities, however, according to a 2022 report by KPMG and Quinlan & Associates.

“Non-adherence to rapidly evolving ESG standards will leave regional asset managers open to sizeable reputational risks, and create challenges with respect to capital raising, especially from offshore investors,” the report warned.

Tan Huck Khim, deputy chief investment officer and head of alternatives at Singapore fund house Fullerton Fund Management, acknowledged that foreign institutional investors were still “rather wary about greenwashing issues in Asia”.

But part of the role of Asian asset managers is to build trust with investors around sustainable investing in the region, and to propose an “Asian way” that takes into account the lower standards of climate disclosures, he said.

“Those disclosure standards will rise over time, but we need to have an Asian way of how to deal with the lower amount of information available,” said Tan.

Last month Fullerton rolled out a sustainability management framework for private equity climate investing in Asia in partnership with the UN Development Programme.

Having an on-the-ground presence in markets often neglected by global investors in the sustainable investing space could be an advantage for Asian fund firms.

Rachel Ong, chief marketing officer at Singapore’s UOB Asset Management, said the coverage by some global fund firms of ESG opportunities in south-east Asia was “not very deep”, and so local firms could find opportunities.

UOB AM has 13 ESG personnel working in its investment teams across Asia responsible for engagement with local investee companies.

Building out a region-wide capability requires an understanding of local languages and cultures and can create “differentiated” perspective, said Ong.

Demand for ESG mandates focused on south-east Asia was still low, however, Ong said.

“Maybe it will take a bit of time, but at least we want to be ready and we want to make sure that we have the proper structure and framework.”

*Ignites Asia is a news service published by FT Specialist for professionals working in the asset management industry. Trials and subscriptions are available at ignitesasia.com.