Although the principles of sustainable investment (or sometime called ESG-based investment) are similar in the way that investors would like to invest in a company that support the Environmental, Social, and Governance aspects, but the sustainable investment approach varies between asset managers. In other word, each asset management company tends to follow their proprietary ESG investing approach. Therefore, what will be discussed in this article is based on my experience as a fund manager at UOB Asset Management. In addition, I also suggestions the database that the audience can find the ESG-related information for investing in Thai Equity and Thai fixed-income at no cost.

The first thing that fund managers and investment advisors should do when constructing the investment portfolios is to understand the needs of their clients in order to create the optimal portfolio based on our clients’ objectives. ESG-based investment has many aspects to consider, namely environmental, social, and governance. As someone who takes care of the client’s money, you should understand which ESG criteria the customer focuses on the most. For example, some customers might focus on the environmental aspect like global warming, or some might focus on having a company with good governance because it can reduce the risk of being manipulated in the future. Typically, expected returns and the level of risk tolerance are the main topics to formulate the investment policy. In my opinion, ESG should also be presented as another topic to formulate the investment policy going forward.

Currently, investment policies of institutional investors often mention about the role of ESG in the investment process, otherwise known as the ESG Investment Process. In the future, personal client investment policies will become more involved with the ESG. It is important to discuss with clients which part of the ESG is wanted and to arrange portfolios accordingly, since doing so will prevent misunderstandings in the future. For example, a client might think that a particular fund is focused on the environmental aspect when it is actually focused on the social aspect of the ESG such as not using child labor.

How to select securities using ESG criteria?

Once the investment policy is formulated, the next step is the selection of securities into the portfolio. To illustrate, let’s show a fund that invests fully on stocks in order to picture the role of the ESG integration in the portfolio. Let’s say you are a fund manager who has a client that wants to invest in Asia Equity Fund. The first thing we should do is to select stocks that we can invest in, such as large-cap stocks with reasonable liquidity. The stocks that we can invest in are called the stock universe.

Now that we have the stock universe, the next step is to analyze the ESG issue of these stocks. The challenge is that we have around 1,600 stocks in the universe, which will take a long time to analyze by a team of analysts. We tackle this challenge by the use of technology, which generally consists of two parts. The first part is automatically extracting information from related databases such as MSCI, S&P Global, Bloomberg, and news on these stocks. Since we have a lot of stocks to analyze, automated data retrieval is therefore required so that we can analyze it in a timely manner. The second part is processing the data with the help of Artificial Intelligence to get an estimate of the ESG score based on the data retrieval from the first part. Since the data derived from the database in not complete, especially for developing markets including Thailand, it is quite essential to have a team of ESG analysts to collect the missing data that is relevant for us to make an ESG assessment. The result is the ESG score of each stock in the form of A, B, C, and D, with A being the best ESG obtainable score.

The next step is to use the quantitative prediction models to identify the most suitable stocks to put in our Asia Equity Fund. The fund manager analyzes the results of the model in order to identify 60 stocks with the optimal risk return profile, and ESG scores that meet the given criteria such as only A and B. Then, an ESG analyst team will deliberately analyze the ESG related issues by sending questionnaires or talking to management to accurately readjust the ESG scores. The aim of this stage is to identify the final 30 stocks for the Asia Equity Fund.

In the last step, after we have our final 30 stocks, we will invest in these stocks for the Asia Equity Fund. After the initial investment, we still have to continually assess the ESG of each stock in our portfolio because their ESG score can change due to various factors such as changing business strategies or disputes regarding illegal labour.

Now that you have all seen the overall portfolio construction, let’s take a closer look at the ESG analysis. The structure of the ESG analysis consists of three pillars, the first being environment, the second being society, and the third is governance. Each pillar has its own important topics. The main topics in environment are waste management and greenhouse gas emissions that contribute to global warming. For society, it’s the work safety of employees and security of customer data. Lastly, the main topics for governance are business ethics, proper management of a company, proper payment of taxes, and transparency. These aspects of the ESG will be given emphasis depending on the suitability of each industry. These respective emphases will be calculated into a weighted ESG score.

When ESG analysts receive ESG-related news about a company, the ESG score may be adjusted. The score arising from these disputes will be called the Controversy Score. In each news, the Controversy Score will be subtracted from the Weighted ESG Score. For example, if a particular stock was originally given a rating of B and a serious dispute caused its score to drop to a D, we may have to consider selling that stock.

How to get started with an ESG investing in Thailand?

For investors in Thai stocks, the website www.settrade.com has compiled ESG scores from various sources on the ESG page. This makes it convenient to find information and the THSI, otherwise known as Thailand Sustainability Investment. This is organized by the Stock Exchange of Thailand, which selects stocks with sustainable business operations. They must have a sustainability score of at least 50% in each ESG aspect or is a stock that is a member of the Dow Jones Sustainability Indices. In the most recent year, there are 124 companies which possess sustainable stocks. Choosing to invest in these companies is an ESG investment choice that has clear, applicable guidelines.

Companies will usually issue both stocks and bonds, so ESG consideration for stocks can be based on the same principles and methods used on stocks. However, if a company wants to issue bonds to fund a specific project such as an environmental project, it is considered a green bond. If the bonds are issued to fund a social project, it is considered a social bond. Lastly, if a company issues bonds to fund bonds both environmentally and socially beneficial, it is considered a sustainability bond.

For investors in Thai bonds, the website www.thaibma.or.th has compiled ESG-related bonds, making it convenient to find information.

What are some popular ESG investment strategies?

Opting out of certain industries investing or Negative/Exclusionary Screening has decreasing growth rates because of the more elaborate ESG processing nowadays. In the early stage, to classify some industries out of the list are simpler practices. However, the weakness is that many asset managers see analyzing ESG as a way to positively impact the environment, society, and governance. We want the company to care about environmental protection, social development, and better governance. Removing every company in the industry in then similar to ending the opportunity for us investors to play a role in these companies.

Positive/best-in-class screening is gaining the popularity nowadays. Investing in companies that possess commitment and demonstrate efforts in reducing global warming without limiting the investment industry, for instance, investing in companies in the coal industry that are improving air filtration efforts. For some clients who wish to invest directly for ESG purposes, such as reducing global warming, they may invest in sustainability-themed funds. Another increasingly popular strategy is the ESG Integration. This is done through systematically incorporating an ESG principle into the investment process.

It can be seen that ESG strategy has been evolving over time. We will likely see a new ESG investment strategy in the future. Therefore, an investor should study the different ESG strategies that will be used on the funds we invest in. Some funds may use more than one or many combinations of strategies. This information will be revealed in the Fund Fact Sheet or Fund Presentation Deck.

Why the Europe’s Sustainable Finance Disclosure Regulation (SFDR) is relevant?

So many regions in the world value the SFDR because Europe is considered as the leader of sustainable investment. The amount invested in ESG funds makes European rules often used as a model in other regions around the world. The SFDR rules were implemented in early March by making asset management companies classify their funds into three groups according to Article 6, 8, or 9, depending on the sustainability objectives of the investment product.

Article six states that all funds will have a partial disclosure of ESG information, while funds under Article eight and nine are required to display more detailed information about the ESG to investors. Article eight is a presentation of a fund that combines both environmental and social factors along with other factors. Article nine is a fund with a sustainable investment objective. It will be an investment in companies that will have a positive impact on society and the environment, following good governance practices. Therefore, funds under Article nine are usually thematic or impact funds. These information are usually disclosed in the Fund Fact Sheet or Fund Presentation.

What is the recommended approach to select an ESG Fund?

In each fund, the first thing we should look at the is overall ESG score. For example, if the asset management company has funds classified as A, B, C, D, and this fund has a rating of A. This means that the asset management company has chosen stocks and bonds that are classified as having positive impact to the environment and society. If the fund we chose has a rating of D, it might imply that the securities in this fund might be selected without using the ESG criteria. The ESG score coverage shows how many percent of stocks or bonds in the fund received ESG ratings of A, B, C, and D. We should compare the funds’ ESG score to its benchmark. For example, the asset management company reveals that the fund may get an A while the Benchmark got a B in the fact sheet. Funds that are classified as Sustainable Investment should receive a higher rating than the benchmark.

Furthermore, we could look for further details on the matrix used to calculate an ESG scores in the securites that the fund holds. Important metric measures of the environment include: greenhouse gas emissions, reducing energy consumption, reducing water usage, and reducing the release of waste. For society, such as the role of women in the workplace, it includes: the percentage of women in the management level, number of hours used in educating employees, and work safety. For governance, it includes: checking the work of the management side, paying taxes properly, disclosure of the salary of executives, and having policies to prevent bribery.

Over the past several years, UOB Asset Management Co., Ltd. has incorporated ESG into our own investment process. This article is an introductory overview in the ESG investing landscape. With our local expertise and dedication toward an ESG investment, we aim to be an ESG leader investment house in Asia.

Article by

Sirianong Peyasantiwong

Fund Manager, Multi-Asset Department,

UOB Asset Management