Asia’s Leading ESG Funds Boost Returns in Markets Ignored by Investment Managers

Asia’s leading ESG funds are reaping the rewards of investing in Japan, a market largely ignored even by local sustainability-focused investment managers.

According to data compiled by Bloomberg on ESG funds with at least $250 million in assets, four of the top five in the region this year are concentrated in Japan, where overall returns are over 17 percent. This exceeds the average gain of 1.1% for Asian ESG funds in general and 16% for Japanese stock indicator Topix.

Money managers with strong mandates in Japan have tended to avoid their home market, citing relatively low returns and substandard environmental, social and governance practices. Those who have stayed close to home benefit from improved corporate governance, a dose of inflation, and support from billionaire investor Warren Buffett. This adds to optimism for Japanese equities, which have been among the best in the world this year.

Alma Eikoh Japan and Goldman Sachs Japan Equity Partners have joined Asia’s leading ESG funds this year, with returns of over 20 percent each. The Alma Eikoh Foundation has profited from industrial companies including Japan Airlines Co. and Mitsubishi Heavy Industries Ltd. The former is raising billions of yen to finance the transition, while the latter seeks to use hydrogen and carbon capture technologies to reduce carbon emissions. Nearly a quarter of the weight of Goldman Sachs’ fund comes from technology firms such as Sony Group Corp.

ESG-focused funds include investments with common attributes, including a focus on climate change and clean energy, according to data from Bloomberg.

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Meanwhile, stocks of Japanese mid-cap stocks are supporting the performance of iMGP’s Japan Opportunities fund, which has outperformed 90% of its peers this year, according to Bloomberg data. The Tokyo Stock Exchange’s January call for companies to boost their return on equity and raise prices above book value is aimed at small- and mid-cap companies, financial manager Joel Le Saux said.

Mid-cap companies may not be “best-in-class in terms of ESG rankings,” but that doesn’t mean their ESG performance is poor, said Le Saux, whose so-called Article 8 fund gets its name from buying top-performing portfolio companies. . ESG evaluates and releases less carbon than the reference.

“They just don’t have the resources to write good reports that the ESG ratings agencies like,” and they get punished for it, he added.

For Japan, the big risk in terms of ESG will be environmental, he said, as emissions regulations come into effect. This year, the world’s fifth largest emitter began pricing carbon through a voluntary emissions trading scheme. Bloomberg News

However, progress in corporate governance in Japan is obvious to some. Companies are adding more independent directors and doing more share buybacks to boost profits, said Samuel Lo, senior analyst at Morningstar Inc.