Gathering momentum: The ESG journey in Asia

15/04/2018

Managing ESG across different investment dimensions

After a relatively slow start, environmental, social and governance (ESG) investing is finally finding its stride in the Asia Pacific region, as old imperatives and ideals are reshaped by a new generation of investors.

With ample room to grow -- the proportion of socially responsible investments to total managed assets in Asia ex-Japan is still under 1 percent according to the Global Sustainable Investment Alliance, versus over half in world-leading Europe -- the region can continue to expect increasing inflows into ESG assets.

The advantages of an ESG investment strategy have been established by a large body of research that shows strong links between ESG factors and corporate performance. Companies with a solid record across the three ESG dimensions tend to reward shareholders with greater value, and lower volatility and risk, strengthening the argument for examining regional sectors and assets through an ESG lens.

Companies with a solid record across the three ESG dimensions

tend to reward shareholders with

GREATER VALUE,

AND LOWER VOLATILITY AND RISK

This is particularly relevant to Asia as studies have also shown such a strategy has the greatest impact in emerging markets, with ESG emerging market indices tending to perform better than their developed market counterparts. This is not lost on Asia’s millennial investors, who increasingly view sustainability and financial value as linked. One study showed nearly two-thirds expect sustainable assets to outperform mainstream investments.

A region goes green

While ESG investing in the region has in the past been held back by a lack of understanding of industry practices and standards, and scant regulatory support, this is quickly changing. A growing number of pension and sovereign wealth funds in Asia, such as Japan’s Government Pension Investment Fund, are integrating ESG factors into investment strategies, while stock exchanges across the region now require listed companies to report on sustainability practices.

This coincides with a clear and growing focus on sustainability, and particularly green infrastructure and renewables, among both governments and corporations. China, the world’s largest installer of wind power, has outlined a new three-year plan to combat air pollution, while another Asian powerhouse, India, is pushing to add record levels of solar power capacity. Institutions like the Asian Infrastructure Investment Bank are committing billions of dollars to green infrastructure projects across Southeast Asia.

The convergence of these factors has prompted a surge both in issuance of and demand for ESG assets. China is now the world’s second-largest issuer of green bonds, producing over $37 billion worth (both onshore and offshore) in 2017, up 4.5% over the previous year. ESG investing is also expected to receive a boost in countries like Malaysia from the focus on shariah-compliant investments, which share similar standards.

A GROWING NUMBER OF
PENSION AND SOVEREIGN WEALTH FUNDS IN ASIA ARE
INTEGRATING ESG FACTORS
INTO INVESTMENT STRATEGIES,

WHILE STOCK EXCHANGES ACROSS THE REGION NOW

REQUIRE LISTED COMPANIES TO REPORT ON SUSTAINABILITY PRACTICES

Responsible returns

To make the most of these dynamic trends, it is necessary to eschew so-called ESG protectionism, which avoids emerging markets or certain sectors (such as power generation) and the greater levels of risk they represent altogether. Instead investors should adopt a more nuanced approach that evaluates and manages individual assets on their own ESG and performance merits.

This calls for an integrated investment strategy – one that incorporates fundamental research aided by intelligence from on-the-ground sources to closely analyse the ESG track records of companies and sectors, and financially material ESG factors, to pick best-in-class assets across the Asia Pacific ESG investment universe.

Such an approach, combined with the active stewardship of ESG in the region through direct company engagement and the use of proxy voting practices, helps recognise and manage ESG tail risks to build a portfolio that actively contributes to positive societal impacts, while delivering robust returns to the region’s increasingly sustainability-minded investors.