Morrison Foerster, a top global law firm, just released the results of its first Asia Funds ESG Report. The report shows that there is a gap between raising awareness of ESG and putting it into deals and operations.

The new report, Navigating the ESG Maze, published in collaboration with AVCJ, shows that the ESG framework offers opportunities for fund managers, such as implementing ESG policies at target companies to increase company valuations; engaging ESG professionals to assist with enterprise risk assessments related to climate, Diversity, Equity & Inclusion (DE&I), and governance; and staying ahead of greenwashing claims by conducting ESG audits of their investments and marketing efforts.

Marcia Ellis, global chair of Morrison Foerster’s Private Equity Group, said:

"Certainly, fund managers are re-evaluating their approach to ESG, and almost all have at least started on their ESG journey. Every respondent to our survey says they take ESG criteria into account when making investment decisions, with more than two-thirds describing it as a deciding factor.

"However, Asia GPs are generally behind other areas of the world on ESG adoption and practice, and while significant progress has been made in the past few years, there is still a long way to go.”

Susan Mac Cormac, global chair of Morrison Foerster’s ESG Group, said:

"Our findings reveal that many fund managers are still at an early stage of their ESG journey, and this provides an opportunity for fund managers in Asia to get it right from the start.

"Many GPs are making the mistake of only treating ESG as a compliance issue – whereas the real benefits in embedding ESG considerations are driving value, managing enterprise risk, and reporting.”

Findings

As an example of ESG's global reach, every respondent indicated that they considered ESG criteria when making investment decisions. The benefits of enhanced ESG practices for reputation and investment prospects are seen by general partners (GPs), with a vast majority (69%) believing that ESG can be a decisive factor when making investment decisions.

The potential for ESG to raise the value of a target company is a strategy used throughout the field. 82% of respondents said they had invested in companies with negative or neutral ESG credentials with this strategy in mind. A large majority (83%) of GPs say that positive ESG measures increase the value of a target, and 91% of GPs say that positive ESG metrics make it easier to get out of a company.

Greenwashing

As the number of sustainability and ESG funds has increased in recent years, regulators in Europe and the United States are assessing how to combat greenwashing.

Even though ESG regulations have not grown as much in Asia, the report shows that GPs in the area may be at risk of being accused of greenwashing.

Almost no fund managers have been accused of greenwashing their organisation or fund, although 60% of respondents indicate they promote some investment activity as "green."

Also, fund managers' interest in ESG seems to be limited to their investment criteria for target companies and not to their own companies, since only 22% of funds have a dedicated ESG professional and only 14% tie the pay of investment team members to ESG goals.

'S' in ESG Needs More Focus

While the environmental side of ESG has received the greatest attention, the social component has quickly gained prominence. Over the last decade, operational and reputational risks, as well as legislation, have risen considerably about human rights and equality. This is reflected in the high percentage (88%) of fund managers who said that conveying the relevance of DE&I concerns is the most important step they have made to improve DE&I in their organisations.

Incorporating ESG concerns into a fund's or company's policies and operations aids in not just complying with existing rules and regulations but also in identifying company-wide risks and opportunities to build value. Only 50% of fund managers believe they are committed to diverse leadership representation, and only 33% have made a financial commitment in this area.

Fund Managers Not Seeing ESG Due Diligence as a Required Risk Mitigation Strategy

Fund managers consider ESG due diligence as an essential risk reduction tool in regions with more developed ESG programmes. In Asia, however, less than half of respondents (46%) undertake ESG due diligence on every deal, with another 46% doing so on most deals. Moreover, in the United States, fund managers increasingly include ESG provisions in investment documents.

However, in Asia, less than one-third (29%) of respondents always need ESG compliance clauses to be included in investment documents. These clauses provide explicit expectations and targets on important ESG concerns, as well as address any allegations of greenwashing, an area in which regulators are becoming more active.

Source: Morrison Foerster

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Learn more about the report from Morrison Foerster here