ESG Integration

ACP's Partners have strong credentials in ESG and are committed to the integration of best practices in managing environmental, social and governance (“ESG”) issues. Responsible investing is at the core of ACP’s investment doctrine and guides all aspects of managing third-party capital. ACP is fully compliant with socially responsible investing (“SRI”) principles, giving its investors the opportunity to combine their financial return objectives with achieving social good. In practice, ACP will integrate ADB's industry-leading ESG framework fully into all stages of its investment process. This framework requires that all of its investments comply with its Safeguard Policy Statement, a comprehensive 3-in-1 policy that covers both environmental and social (involuntary resettlement and indigenous peoples) issues. 

The role of ESG integration in value creation

Robeco recently collaborated with a team of students from the Hong Kong University of Science and Technology’s Business School to complete a study on “The Role of Governance relative to Environmental and Social Factors in Equity Returns”. The study found that Asian equity investors can capture better returns and lower portfolio risk by considering Environmental, Social and Governance (ESG) factors, specifically the governance factor. The team conducted a series of correlation and causality tests on 1,375 public companies across Asia, Europe and North America, investigating how ESG factors impact stock prices and volatility using RobecoSAM’s Corporate Sustainability Assessment Scores (as proxies for ESG performance) and concluded that: 

  • While there is a high degree of correlation between Environment, Social and Governance factors, causality analysis reveals that improvements in the Environment factor will eventually lead to improvements in Social and ultimately also Governance factors. However, in Asia the causality is much weaker as improvements in Environment only caused changes in the Social, but not in the Governance factor. 
  • However, relative to other regions, the Governance factor is very important in Asia. An increase in the Governance factor in Asia improves the risk/return profile of the companies; in generating higher return while simultaneously reducing risk. The negative relationship between Governance and volatility seems less significant for other regions in the world, implying that markets outside Asia already price in good corporate governance. 
  • Investing in the top 10% of companies (by ESG scores) leads to higher dividend payout ratios and lower risk than the bottom 10% of ESG performers. Selecting the top 10% of companies generates a statistically significant higher dividend payout ratio. In addition, the same strategy for the universe of Asian companies would have provided a portfolio with significantly lower portfolio risk. 

 ESG concerns are increasingly being factored into the valuation and management of financial assets. Issues such as climate change, sustainability, consumer protection, social responsibility and employee engagement are no longer viewed solely as components of risk management, but have also gained recognition in recent years as important drivers of firm value, particularly in the long term.  Based on responses from 42 private equity firms, representing a broad geographic and sector focus and a cumulative total of over US$640 billion in assets under management, the findings of a recent survey indicate that ESG policy – far from being a peripheral consideration – emerges as a core value-creation strategy for portfolio companies (Coller Institute of Private Equity, 2015).

The growing recognition of the tangible and intangible value of integrating ESG issues into core business activities, and the linkage between ESG performance and total returns, underpins our commitment to embedding ESG factors into every step of ACP's investment process.