Is it philanthropy or ESG investing?
“Five years ago, many would say to us, ‘if this is helping the poor, then it should be charity, but if this is making a return, then how does it help the poor?’”
JOYCE CHEE, CREDIT SUISSE
CLIFFORD LEE: We are at the initial stages of developing this market in Asia and although this bond was a crucial start, there’s more to be done. Institutional funds that had ready funds did not have a pre-defined portfolio they could park the investment into. They didn’t quite know how to fit this. Then when we go to private banks and non-profit organizations, those driven towards philanthropy, their reaction was, ‘I’m used to giving money away’. I don’t have a mandate whereby I invest, and I don’t have a process in place to monitor investments. So, it came to a situation where there may be sustainable or social issuers, but the market was not yet set up to accept such products – and this continues to be the case. One way to solve this is to structure it so it can get explicitly rated. Then, we don’t need to position this as a social-impact investment bond to generate more interest, because the market will take it up. If we have a portfolio where certain parts of it go into investments that do not have certain liquidity, that segment can grow. Once it does, that segment will have liquidity by itself and that will solve the problem – but it needs that little push.
JOYCE CHEE: Those are the kinds of conversations that we have a lot with, not just clients, but also with the bankers themselves, in terms of what impact investing is. Especially in the earlier years of the relationship. Five years ago, many would say to us, ‘if this is helping the poor, then it should be charity, but if this is making a return, then how does it help the poor?’ Today, three or four years down the road, the understanding of this topic has evolved. It is important, within the bank, that we continuously equip our client advisers so that they can go out to clients and educate them on the power of deploying private capital to solve these massive social, environmental challenges. This is not philanthropy – you will be getting market-rate returns – but yes, your money is being deployed to solve a social or environmental problem. That is wonderful because, the scale of the challenges that the world faces today need to be addressed.
LESLIE LIM: It’s interesting that we try to bridge the two areas of charity and investing. Sometimes I think it’s difficult for people to wrap their minds around that. They think: ‘Is this investing or is this charity?’ Then, sometimes there’s also danger when you invest for charity purposes and then you end with returns that are either too high or too low.
TOM KEENAN: The line between charity and investing has got so blurred at times, that’s why this perception of a trade-off is so widespread. We really need, as an industry, to clearly define the fact that charity and investing are different. If we want to make this mainstream, that’s absolutely critical, because this cannot be about charity. Charity is obviously, critically important, but that’s over here and investing and making money is over there.
KANOL PAL: Many major foundations realise that philanthropy money is limited, and they’re moving more and more into impact investing. DBS has partnered with IIX to launch the Women’s livelihood bond. At BNP Paribas, we launched the Tropical Landscape Financing Facility bond in 2018. Out of ten HNWI clients, probably eight bought it on the basis of yield, but I find the case of one client interesting. They are moving money from the philanthropy pocket into impact investing, because they realise that if they get a good coupon for that, then it can help sustain their philanthropy efforts. This is what many foundations are trying to do.
MAURICE MEIJERS: Typically, our industry loves to come up with solutions for a problem the client didn’t have or did not realise they had. So, rather than just taking a thematic approach, some of the big pension funds and insurance companies in Europe are looking for a way to put their buckets of capital to work to help to achieve some of this. For that, you need a framework. At some point it’s in a universally accepted way. That’s probably the higher goal right here.
“We really need, as an industry, to clearly define the fact that charity and investing are different . If we want to make this mainstream that’s absolutely critical”
TOM KEENAN, ROBECO SINGAPORE
MAURICE MEIJERS: Yes, we do. You mentioned yourself you find there is a couple of SDGs that are not really investible. These are generally topics that it is better to approach from an engagement perspective. If you look at our engagement policy, we engage with all our funds but we also have specific engagement contracts where we’re just not managing assets with an engagement policy for clients. Most of the engagement topics are thematic and mostly aligned with the SDGs. We also chose these topics so we can have an additional way to influence companies.
JOHAN JOOSTE: Just look at the most recent one, let’s call it ‘investor engagement’. It was Soft Bank with WeWork. In Europe and the UK, after the financial crisis, lots of institutions had to take serious notice of what investors and other institutions were thinking about remuneration policy and risk policy on bank balance sheets, in advance of what the governments were doing. Some of those regulations still haven’t even taken effect, but the investors had a distinct impact on corporate behaviour. We don’t need to wait for governments, but if they play ball also, then you start to move the needle much more.
CLIFFORD LEE: On that point, the banks are already doing that. So for example, at DBS, we have green loans. These are green loans that we originate. Then, we set certain ESG hurdles that, if met by the issuer, will result in a lower interest rate. This has a direct influence on corporate behaviour. We can do that because we’re lending, but for us to bring this to everyone else – to invest in a bond where the coupon will keep going down as long as the issuer continues to improve on the ESG front – will still be tough for the market to accept.
CLIFFORD LEE: The coupon reduction point is hard to sell to investors, whereas an increase for violations of pre-stipulated ESG hurdles is easy to sell to them but hard for issuers to accept. So, a balance has to be struck. We’re still trying to work on something that will have both sides see eye to eye. More issuers than we realise have defined ESG and sustainability standards. It’s just that they haven’t put it out. We want to create an opportunity for them to showcase their ESG best practices and tell the market what they’re really about. Another point being discussed in the market is for sustainability to be ingrained into part of companies’ credit rating matrix. Then we will have a consistent and applicable standard throughout the market. We’re still some steps away from that because, again, the sustainability market in Asia is still in its nascent stages and many companies can still afford to not be rated in the first place.
KANOL PAL: The engagement theme is an important consideration for us. In our selection criteria for ESG funds, we have ESG integration as well as engagement. So we are working with fund managers like Robeco and other asset managers to get them to increase engagement with the companies they invest in.