Pragmatism rules in Asia's ethical investing debate

By Nick Edwards

02/21/2002

HONG KONG (Reuters) - The US$1.4 trillion ethical investing business is a concept gathering pace in Asia, but when it comes to making money, funds prefer pragmatism to populism.

"It's an issue that very rarely comes up. Really you're talking about the froth on the daydream," a senior executive with a major emerging markets fund house, who declined to be identified, told Reuters.

That froth engulfed fund managers in Asia on Thursday after the world's biggest pension fund, the US$151 billion California Public Employees' Retirement Scheme (Calpers), said it would sell assets in Indonesia, Malaysia, the Philippines and Thailand because they did not meet toughethical investment standards.

Malaysia and Indonesia were dropped for getting poor marks on human rights, the Philippines appeared to miss out for financial reasons, while Thailand's score was mixed.

The four join a list of economies off-limits to Calpers including Jordan, India, Egypt, China, Columbia, Pakistan, Sri Lanka, Morocco and Russia -- restricted for financial reasons.

But while subscribing to high ideals is attractive, other money mangers say generating returns is their overriding concern.

"At the end of the day we are here to deliver a return to our investors so we have to make sure the companies we invest in are delivering a return to us," Julie Liew, business development director of Henderson Global Investors (Hong Kong) said.

"The first criteria is always to look at the financials, the fundamentals. Then we look at them from a socially responsible perspective and reward good practice," said Liew, whose firm is a global leader in socially responsible investing with a portfolio worth about US$1.5 billion.

Socially responsible investing covers a multitude of issues, from projects at the forefront of renewable energy, to backing companies that deliver best practices in the workplace and includes ethical issues like not investing in arms, tobacco and alcohol makers or in nations with poor human rights records.


POLITICAL DECISION

Industry players were doubtful that the Calpers move, which affects about US$1 billion worth of investments, would spark a broader shift of funds away from Southeast Asian markets.

"I don't think this is the sort of move that is indicative of a general trend," said Mark Konyn, Asia director of Dresdner RCM Global Investors which has some US$6 billion invested in Asia.

"They are making a political decision. They are one of the few pension plans that do have an exposure out here. Generally, big U.S. players do not have big exposures out here," Konyn said.

The small markets of Southeast Asia have fallen off many fund managers' radar screens since the economic crisis of 1997/98 as poor liquidity, shrinking capitalisation and poor transparency have seen their weightings steadily reduced on benchmark indices like those from Morgan Stanley Capital International (MSCI).

Other fund managers were puzzled by the decision that pulls Calpers out of the best performing markets in world this year, especially as all four have made strides in economic reform.

Some, like Indonesia, have also undergone radical political change. The country is now nurturing the world's biggest Muslim democracy after ending three decades of dictatorship in 1998.

In local currency terms the Philippine Composite Index has jumped 23.6 percent, Thailand's SETI has gained 20.7 percent and Indonesia's Jakarta Stock Exchange is up 16.6 percent in the year to date.

Only Pakistan -- already off the Calpers list for financial reasons -- is better, with the Karachi 100 up 35.7 percent over the same period.

OBLIGATIONS TO INVESTORS

"I think Calpers could be in a very difficult position if the MSCI was to start raising its weightings in emerging markets. They could then be criticised for not fulfilling their fiduciary obligations to investors," said emerging markets fund manager, with about US$200 million in Asia.

With pension returns falling across the board and an ageing population in the world's developed economies, ignoring markets with the highest-yielding asset could prove a costly strategy.

"The reality is that pension funds are going to be forced to take pragmatic decisions because they need the higher returns to support ageing populations," the fund manager added.

Even the keenest advocates of ethical investing viewed the Calpers move with caution.

"Calpers really has to be praised for taking its ownership
responsibilities seriously and that is crucially important even if one does not agree in totality with the decision they've taken," Tessa Tennant, chairwoman of the Association for Sustainable and Responsible Investment in Asia, said.

"But it's pretty hard to have a blanket ban on social criteria at the country level, because in all those economies there are some companies doing great things," she said.