UOB Asset Management: A ‘Man-and-machine’ approach to ESG investing in ASEAN

Provide a short overview of the practice, process or product that is being proposed for the award, including a description of how it is an innovative approach to ESG incorporation and its coverage within your firm.

Relative to global developed markets, ESG analytics in the Association of Southeast Asian Nations (ASEAN) region is at an early stage of development. A key challenge is the availability of company ESG-related data and disclosures. Moreover, existing ESG research largely focuses on ASEAN benchmark index names. A unique sustainable investment framework is required to mitigate these challenges.

UOB Asset Management (UOBAM) developed a differentiated approach to sustainable investing in ASEAN that is anchored on the concept of ‘Man-and-Machine’ – a combination of technology with strong on-the-ground fundamental research.

By developing an Artificial Intelligence-Machine Learning (AI-ML) ESG model called the ESG Analyser, the firm generates its own ESG data, scores and reports. Furthermore, UOBAM, with its extensive presence in ASEAN, has set up dedicated ESG resources across its regional offices. This enables deep local engagement with companies in the portfolio, while identifying long-term ESG trends and opportunities within ASEAN.

This novel combination of technology and regional human analyses has greatly increased the efficiency and consistency of UOBAM’s ESG assessment. The ‘Man-and-Machine’ approach has expanded ESG coverage by nearly 400 companies, and raised investee companies’ ESG awareness. We believe these achievements, and our future initiatives, could significantly advance ASEAN’s sustainable investing landscape.

 

Describe why you decided to undertake this approach.

ASEAN  is highly vulnerable to the impacts of climate change, biodiversity loss and resource scarcity, due to its geography, rapidly growing population and heavy economic dependency on resource-rich and carbon-intensive sectors. Interest in ASEAN ESG-themed investing has grown in the past decade, but the development of sustainable investing is being hindered by a lack of consistent ESG metrics. The key problems are:

• Third-party data providers offer limited coverage of ASEAN securities, with information deficits especially on smaller and newly-listed companies. This particularly impacts identification of potential sustainability leaders.
• Disclosure requirements currently vary across ASEAN regulators. The differences hinder comparison of companies against peers on the basis of defined benchmarks.
• Global standards cannot be universally applied to local contexts, and it is sometimes necessary to compensate for cultural nuances. For example, many companies in ASEAN are family-owned, a structure penalised by most ESG ratings providers.

In light of these problems, UOBAM applied its ‘Man-and-Machine’ approach to develop a proprietary sustainable investment framework. The firm has leveraged its dedicated regional ESG resources and local expertise to enhance ESG research and dialogue with companies. The structure and capacity that the regional offices provide creates the opportunity for UOBAM to help develop the ESG landscape in ASEAN.

 

Provide a practical example of how you have applied your approach to an investment (security/issuer/sector/asset class/portfolio).

UOBAM’s sustainable investment framework is used across the firm regionally and applied to various investments. One example is the firm’s Sustainable Asia Top-50 Fund (SAT50), which invests in up to 50 top corporations in Asia. Companies are selected on the basis of strong ESG performance and fundamentals to offer long-term growth potential.

Machine

SAT50 adopts UOBAM’s ESG Analyser, which incorporates AI-ML models together with a materiality map of key ESG issues to generate three research models: ESG News, ESG Scores, and ESG Reports. It provides consistency in assessments, reduces data bias and creates more robust ESG profiles.

The scoring process is complemented by an AI-ML controversy news system. This enables real-time tracking of controversies and informs assessment of ESG impact. By feeding raw news into a Natural Language Processing (NLP) model, recommended controversy scores are generated and incorporated into the ESG score.

Man

SAT50 leverages UOBAM’s network of dedicated regional ESG resources. ESG resources conduct research and manually score across multiple countries and sectors in collaboration with the Singapore Sustainability Office. This supplements third-party data and helps address data shortfalls.

The process begins with the completion of a preliminary ESG scorecard, followed by adjustments to ensure the manual score is consistent with scores generated by the ESG Analyser. Through their personal understanding, regional ESG resources are able to effectively engage companies on ESG themes, localised ESG issues and ESG controversies. This enhances the overall scoring methodology. ESG resources encourage improvements in ESG disclosure and monitor companies’ sustainability progress.

Man-and-Machine

Finally, an ESG Intelligence Manager facilitates a two-way transfer of ESG research from regional offices. This provides a common platform for materials generated from the ESG Analyser and by the ESG resources to be stored and exchanged regionally.

The blend of ‘Man-and-Machine’ in the sustainable investment framework enables SAT50 to identify long-term ESG trends and potential sustainability leaders.

 

Provide an example of the outcomes, outline the benefits and challenges associated with the introduction of this initiative, and state what you have learned from this approach that can be applied more broadly. How might you intend to develop the process or practice?

Outcomes and benefits

1. Improved scope of coverage and engagement:

   ESG coverage has increased significantly through manual scoring conducted by dedicated ESG resources.

   We addedcoverage of nearly 400 companies in ASEAN. Indonesia’s ESG coverage increased from 40% to 89%, adding 133 companies, while Vietnam started from zero and achieved 60% coverage with 70 manual scorecards. In Malaysia, ESG coverage rose from 55% based solely on data provider coverage to 100%, after manual assessments of an additional 73 companies. Thailand’s coverage widened from 30% to 95%, with an additional 121 companies assessed.

   UOBAM’s dedicated ESG resources leverage manual assessments and local knowledge to conduct engagement, drive improvement in ESG practices and boost shareholder value.

2. Performance:

   We believe the ESG enhancements to the research and idea generation process contributed to positive performance. An internal analysis found a positive relationship between UOBAM’s Analyser-enhanced ESG ratings and market performance.

   Using an A to D ratings scale, we found A-rated companies (representing the highest ESG standards) registered higher returns with lower volatilities and lower maximum drawdowns. A-rated companies outperformed D-rated companies in terms of risk-adjusted returns, suggesting that risk-taking is offset by superior performance and ESG rating.

3. Efficiency, data storage and knowledge exchange:

   The use of technology has enabled UOBAM to increase ESG analytical efficiency and consistency compared to a traditional manual process. ESG data and analysis results are stored centrally for easy input and access by all regional offices.

4. Region-wide sustainable solutions:

   The firm’s efforts to develop a structured process for ESG incorporation across asset classes, sectors and geographies has laid the foundation for innovative solutions such as the UOBAM Sustainable Equity Indonesia. This provides investors with access to funds that incorporate ESG considerations. In Singapore, we have also launched the United Smart Sustainable Singapore Bond Fund, which aligns with the national sustainability agenda.

Challenges and learning outcomes

1. A key challenge is the lack of ESG investment professionals within the region. As ESG is a relatively new concept, the talent pool tends to be relatively young with limited experience of sustainable investing. To address this, UOBAM introduced on-the-job ESG training and applied resources to close the ESG skills gap.

2. Given the nascent development of ESG investing in ASEAN, companies are less aware of investors’ ESG expectations. UOBAM saw first-hand the positive impact of on-the-ground engagement through dedicated resources, which helped to raise awareness. The firm will advocate strongly for deeper training and expanded engagement across ASEAN.

Future developments

Further localisation efforts will include:

1. Enhancing the controversy news system by working with regional ESG resources to track news in local languages, increasing the scope of coverage and accuracy of the model.

2. Incorporating and combining climate and biodiversity factors into the sustainable investment framework.

3. Exploring synergies between Shariah-based investing and ESG investing to determine mandate overlaps and assess investor demand.