ESG Investing Gains Traction in Asia
By Kareem Jalal, Writer, GlobalTrading
Sustainable investing has ample room for growth in Asia. Total ESG assets in the region reached $25.4 billion by the end of 2020, with inflows of $7.9 billion in 2020, up from a mere $801 million in 2019, according to the Morningstar Global Sustainable Fund Flows report. Still, Asia’s sustainable investing pool remains a mere trifle in relation to the more than $1 trillion AUM held globally in funds that adhere to ESG principles.
Driven by a confluence of greater retail investor awareness, improved corporate disclosure and more supportive government policy, Asia’s sustainable investing universe is set to flourish. But risks remain, the most prominent of which is “greenwashing,” referring to the practice of companies exaggerating their environmental credentials to obtain ESG-related status.
Asia is finally catching up
Asia is still very much at the beginning of its sustainable investing journey, with the trend only having gained traction in the region over the past two years. By contrast – Europe, which now accounts for over 80% of global ESG AUM – has experienced a decade of growth. Albeit from a much smaller base, Asia is now seeing much faster percentage growth, with J.P. Morgan predicting the continent’s ESG AUM could double in 2021, with an uptick in demand created by ESG funds’ recent strong outperformance in the region compared to standard index-linked funds.
One thing is clear: retail investors in Asia are now keenly aware of the importance of incorporating ESG considerations in their strategies. A recent survey on the issue by HSBC Asset Management found that 84% of mass affluent and high net worth investors in the key Asian markets of Hong Kong, Singapore and mainland China believed that ESG issues were critical to managing their investments, with 64% responding that the pandemic had raised their awareness of such considerations and prompted them to re-evaluate ways of investing.
Moreover, “within the next three to five years, half of the investors surveyed in these three Asian markets believe their portfolios will comprise 100% sustainable investments,” said William Ng, ESG Engagement Analyst at HSBC Asset Management.
However, only a quarter of survey respondents said they explicitly consider ESG factors when making investments, largely because the majority do not know how to approach such investments. Therefore, “the key drivers for future take up of ESG investments include the development of products matching risk and return goals, a wider range of ESG investment vehicles and strategies, government incentives and better information on investment performance and ESG issues,” explained Ng.
Sustainable investing in Asia will also be supported by improved corporate disclosure. A major issue for international fund managers – who are facing increasing pressure from asset owners to embed ESG considerations into their investment decisions – is the lack of ESG disclosures by companies in Asia, and particularly those listed in mainland China.
While Hong Kong and Singapore have already implemented rules on mandatory annual ESG information disclosure, mainland China has yet to follow. But disclosure in mainland China is improving on the back of increased engagement by foreign investors, and is set to ramp up further following the impending switch to mandatory disclosure rules on the Shanghai and Shenzhen bourses.
“Regulators and stock exchanges have been increasing their requirements on fund managers and investee companies. As this trend continues, we expect it to drive the development of sustainable investing in the region,” noted Ng.
Better ESG disclosure could pave the way for greater allocation of funds to mainland China-listed shares, which currently have a 4.9% weighting in the MSCI emerging market equity benchmark, to as much as 25%.
Among recent efforts by Asia-focused asset managers to offer practical guidance to investee companies in improving their engagement with, and disclosure of, sustainability issues, ASIFMA’s Asset Management Group has published a new paper titled Investors’ ESG Expectations: An Asian Perspective. Importantly, beyond disclosure, the paper stresses that driving strategic and cultural change on ESG issues requires commitment and engagement starting from the top of an organization, and cultivating the skills to properly assess ESG issues.
Asia ESG bond issuance is surging
In a further sign of the times, issuance of ESG bonds in Asia has more than doubled in the first five months of 2021 compared to the same period last year, to a record $69 billion. Green bonds accounted for 70% of the total, with the growth driven by liquidity and ambitious policy pledges, such as China’s commitment last year to achieve net zero carbon emissions by 2060, which would require huge investment in renewable energy. Japan and Korea, too, have committed to net zero, and policy support is also coming in the form of government subsidies for green projects in Japan and Singapore.
Among the major opportunities identified by HSBC Asset Management’s Ng, “decarbonisation and net zero pathways will favour renewables and electrification – for example, electric vehicles. Biodiversity is another topic that is rising up investors’ agendas quickly, as is natural capital. And sectors such as sustainable healthcare will benefit from ageing populations in parts of Asia.”
Beware of “greenwashing”
Climate change and green issues are now firmly on the agenda of most Asian governments and financial regulators, setting the stage for a sustained boom in the region’s ESG investing landscape. But along with increased investor appetite for ESG, there will no doubt be growing attempts to attract capital by falsely claiming it will be used for sustainable projects – so-called “greenwashing.”
“Investors have an expansive appetite at the moment but there is also an increasingly discerning approach to investing; they don’t want to get burnt with a greenwashing label,” Kamran Khan, Deutsche Bank’s head of ESG for Asia Pacific, told Reuters.
This may soon lead to growing scrutiny and differentiation of transactions, with investors looking beyond the ESG label to ascertain which companies and projects make the most substantiated positive impact.