Economy & Markets

Investing in Asia’s sustainable future

Sep 15, 2020

As Asia’s investment landscape begins to place more emphasis on sustainability, we examine some of the key trends and opportunities in this space.

In Asia, the initiative to invest in a sustainable way has been slower to gain traction than in other regions. Reasons include less regulatory pressure, less integration into business operations and less demand from investors. All three drivers are changing rapidly. We believe business owners and investors will benefit from understanding these drivers and incorporating them into their investment decisions.

Generation X and millennials are especially keen on gaining more knowledge and becoming more engaged with sustainable investing. At the same time, growing environmental, social and governance (ESG) regulations and standards, as well as green stimulus policies, are emphasizing the issue.

Moreover, domestic asset managers are keen to attract foreign capital. As foreign investors seek to adhere to principles of sustainable investing, more local managers are applying these principles. Notably, more are signing up to the UN Principles for Responsible Investment (PRI), and the number of signatories in Asia has more than doubled over the past three years.

A report by the Economist Intelligence Unit found that 68% of Asia–Pacific investors intend to increase their allocations to sustainable investing over the next year.[1] Interest has accelerated even more during the coronavirus pandemic, which has highlighted that ESG factors are relevant, especially during a crisis.

 

Sustainable investing is on the rise

Globally, total fund assets invested in sustainable strategies were $1.06 trillion at the end of the second quarter of 2020. Assets in sustainable funds in Asia–Pacific comprised just 2.4% of this figure but have been growing. In Asia ex-Japan, sustainable fund assets have grown by about 40% for the past four quarters (11% quarter on quarter) to reach $8.5 billion*.

In addition, Asia–Pacific accounted for more than $50 billion of the global green bond market of $257.7 billion by the end of 2019. China is the second-largest issuer of green bonds globally, with $31.3 billion of issuance aligned with international definitions by the Climate Bond Initiative.

 

Governments are taking a more active role

Governments in many Asian countries are encouraging ESG adoption, with a focus on setting disclosure policies and standards. These actions are driving change – over the past five years, the proportion of companies publishing ESG disclosures has increased to almost 60%.[2]

In addition, governments are promoting environmental standards by adopting emission targets and encouraging sustainable growth through stimulus programs. For example, South Korea announced a New Green Deal in July 2020 with a $35 billion commitment to support renewable energy and environmentally friendly infrastructure. Meanwhile, China is supporting green stimulus, pollution control and the development of alternative energy sources.

From an investment perspective, Asian government pension and sovereign wealth funds are incorporating ESG factors into their investment processes. This has created a ripple effect, with many asset managers locally now looking to adjust their behavior to qualify for investments.

 

E, S, G, or all three?

The threat of climate change and the need for a global response is well recognized by the governments of major Asian economies. There’s also increasing recognition that while climate change affects global sovereign risk through economic, fiscal and external performance, many emerging Asian economies appear most exposed.

Overall, sustainability has been less integrated into business operations in Asia. Asian companies lag global peers on ESG issues as reflected by lower average ESG scores when reported. However, the average ESG scores of Asian companies over the past five years have improved.

Among ESG considerations, Asian investors increasingly highlight the value of governance. An OECD Asian Roundtable observed that corporate governance in Asia has been improving, with transparency and diversity both rising. Younger generations of business owners are particularly interested in making their operations more sustainable to stay competitive.

 

Opportunities to invest in sustainable growth

There is some evidence that shifts in generational wealth will affect the demand for sustainable investing in Asia. Among high-net-worth and ultra-high-net-worth people, Generation X are the most likely to be interested in “doing good and doing well”, while millennials are also interested but not actively engaged. Both groups have limited knowledge – an issue that remains a key barrier to greater adoption.

The opportunity to invest in the growth engines that result from sustainable investment initiatives (plant-based food, electric vehicles and clean energy) could encourage further sustainable investing in Asia. More investors in the region are seeing the potential of sustainable investing to help them take advantage of longer-term growth trends and achieve robust risk-adjusted returns.

With global sustainable investing assets expected to reach $45 trillion by the end of 2020 and thousands of relevant funds available, investors have a growing universe of investment opportunities to choose from.  The key will be to identify best in class managers in the space.  These trends we see constitute tremendous opportunities and Asian investors are ready to seize them! 

 

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[1] Financing sustainability: Asia Pacific embraces the ESG challenge, February 2020. Economist Intelligence Unit.

[2] Average disclosure rate for common E&S metrics for the Asian companies in MSCI ACWI, from 2010 to 2018/19 (latest available) from GS SUSTAIN: Asia regulation: Advances in Hong Kong, Japan & Malaysia, 14 May 2020 Goldman Sachs.

* Morningstar report July 2020 “Global Sustainable Fund Flows”