ESG investment fad attracting billions and paying off so far

[SHUTTERSTOCK]

Funds built on environmental, social and governance (ESG) themes have been attracting a lot of Korean investors recently, as the country continues to grapple with the coronavirus pandemic.

ESG fund investing refers to investing in companies that aim to have a sustainable and social impact, such as energy firms that aren’t reliant on fossil fuels and companies that promote racial and gender diversity.

According to financial information provider FnGuide, Korean investors poured roughly 1.63 trillion won ($1.44 billion) in 42 ESG funds as of March 22. The funds captured 522.7 billion won of net new money from investors so far this year.

Koreans are scrambling to withdraw their investment from non-ESG equity funds. Some 1.19 trillion won has left the market so far this year.

ESG investing is booming not only in Korea but also overseas.

Global ESG funds captured $51.1 billion of net new money from investors in 2020, according to a report from investment research firm Morningstar. That is a new record and double the previous year, when the flows were some $21.4 billion.

“As one of the hottest investment trends recently, ESG funds are drawing attention from many investors all over the world,” said Ko Soong-chul, chief investment officer at NH-Amundi Asset Management’s equity management division.

There are two big reasons behind the recent boom in ESG funds: the outbreak of coronavirus and the start of the Joe Biden administration.

With the emergence of Covid-19 and with issues like global warming and climate change still remaining as challenges, more companies are facing public pressure to lower their impact on environment and contribute to social good, and be perceived as treating their workers well and employ more transparent practices.

The Joe Biden administration is another driving force. As the Biden administration is keen to make climate change a major theme of his presidency, it has been boosting people’s interest in ESG funds.

In Korea, young people play a critical role in boosting ESG fund investments. Young Koreans these days don't always make investments in companies just because they generate large profits. They are likely to put great importance on how they earn money, penalizing those who fail to meet their social responsibilities.

“Korean investors these days want to know how companies earn money, not just how much they make,” said an executive from an asset management firm. “Especially, they are very sensitive to socially irresponsible heads of companies and companies that commit gapjil [abuse of power] against their employees.”

Returns are actually not bad.

Compared to the beginning of the year, the average return rate of local ESG funds is some 6.32 percent, according to FnGuide. That’s higher figure compared to the return rate of equity funds in general, which is some 5.08 percent, as well as Kospi index, that went up 5.64 percent during the same period.

KB Asset Management’s KB STAR ESG Socially Responsible Investment Exchange Traded Fund (ETF) returned 10.12 percent compared to the beginning of the year, while Samsung Asset Management’s Kodex 200 ESG ETF returned 9.38 percent.

Asset management firms manage ESG funds based on the ESG ratings of companies offered by global finance companies such as Morgan Stanley Capital International (MSCI). They choose shares from companies with a BB rating or higher. MSCI rates companies on an AAA to CCC scale depending on what exposure they have to ESG risks and how they manage them: AAA and AA are considered leaders; A, BBB, and BB are considered average performers; B and CCC are considered laggards.

Various conditions, including whether the companies use natural resources when manufacturing products, whether their products contain any toxic substances and their relationships with labor are considered in the process.

Korea’s ESG funds are mostly focused on environment.

In case of NH-Amundi 100 Years Corporate Green Korea Fund, it invests some 30 percent to 40 percent of assets to companies that are pushing hard in the battery, hydrogen and renewable energy businesses.

But critics argue that Korea’s ESG funds are no different from equity funds as they include a large amount of shares from big companies.

In case of Midas Responsible Investment Fund, one of the biggest ESG fund products in Korea, 9.94 percent is invested in Samsung Electronics, 3.4 percent in Samsung SDI shares and 3.15 percent in SK hynix.

“It costs a considerable sum of money for companies to do ESG management,” said Oh Kwang-young, an analyst at Shinyoung Securities. “Only big companies can afford the expenses, and generate profits at the same time. At the moment, it’s inevitable that ESG funds contain lots of shares from those big companies.”

BY HWANG EUI-YOUNG, CHEA SARAH [chea.sarah@joongang.co.kr]