In terms of applying ESG (environmental, social, governance) criteria into investment decision-making processes, Europe is a global leader and well ahead of its nearest rivals, and has been for a long time now. According to Oliver Wyman, ESG investments formed part of the investments strategy for 52.6 per cent of all assets managed in Europe in 2016,1 driven in part by increasing client awareness and regulatory intervention. ESG in APAC (Asia-Pacific), however, is beginning to gain traction, with a number of new developments taking shape in the region.
Incorporating ESG at APAC investors
More investors in APAC are starting to embrace ESG principles. A handful of countries in the region were among some of the earlier adopters of ESG. For example, Japan’s ESG AuM (assets under management) ballooned by 6,771 per cent between 2012 and 2016, with ESG investments now comprising 3.4 per cent of all assets in the home market.2 Meanwhile, Australia and New Zealand both experienced triple digit growth of 285 per cent in ESG AuM between 2012 and 2016.3 Consequentially, ESG investments as a percentage of total managed assets in Australia and New Zealand are now roughly on a par with that of Europe.4
Institutional investors throughout APAC are being very proactive on ESG. Japan’s Government Pension Fund (GPIF), which is one of the world’s largest, signed up to the UN PRI (Principles for Responsible Investment) back in 2015 prompting other regional institutions to follow suit, including KWAP (Kumpulan Wang Persaraan), Malaysia’s second largest pension scheme, who became a signatory in 2018. In addition, there are now 25 PRI signatories in Hong Kong, 11 of whom joined in 2017 alone5, in yet another sign of ESG’s growing influence in APAC. Some investors, however, are going over and above PRI.
GPIF truly cemented its reputation as a regional ESG pioneer when it announced in 2017 that it would allocate 3 per cent of its equity portfolio – or one trillion Yen – into passive funds tracking ESG indices6. In time, GPIF said it will increase its ESG equity portfolio exposures to 10 per cent.7 Institutions elsewhere are also investing more heavily into ESG products, including Taiwan's Bureau of Labour Funds and Thailand’s Government Pension Fund.8 Fund managers have taken note. For example, assets controlled by ESG-linked ETFs and ETPs in APAC ex Japan increased by 43 per cent over the course of 2018 and now stand at USD686 million.9
The number of investment advisers in Australia who said they provided guidance on responsible investment has also grown from 19 per cent to 34 per cent in the last two years.10 Despite this, some of the country’s superannuation schemes are facing mounting ESG pressure from their members, most notably the AUD50 billion Retail Employees Superannuation Trust, which is presently being sued by a member for failing to disclose information about climate related financial risks in its portfolio.11 If successful, this lawsuit could set a major ESG precedent moving forward.
ESG’s rise in APAC has been shored up by several drivers, principally the growing wealth of quantitative and qualitative data indicating that issuers which score highly on ESG deliver better or neutral performance against organisations where ESG is on the margins12. Secondly, sustainability risk has become increasingly important, and it is now being absorbed into investment and credit risk analysis, with more institutions vetoing capital allocations into companies with poor ESG.
APAC regulators zoom in on ESG
In 2018, the European Commission (EC) outlined a new framework aimed at encouraging institutional investors to embrace ESG practices. The initiative – the Action Plan on Sustainable Finance - is likely to be phased in between now and 2022. While the EU is at quite an advanced stage of implementing its ESG legislation, APAC is not trailing too far behind. Unlike the EU where the authorities have the power to impose a uniform piece of regulation across all of its member markets, APAC is far more fragmented, meaning local supervisors are pursuing their own unique approaches towards legislating on ESG matters.
In China, the government has made the development of a fully functioning green bond market a priority in its 13th Five Year Plan.13 As part of its policy programme, China is also looking to promote green development funds and discourage the banking sector from lending so extensively to industries such as coal and steel which are operating at overcapacity.14 The results of China’s efforts so far have been impressive. According to the Climate Bonds Initiative, China is now the second biggest green bond market in the world, with total issuances reaching USD42.8 billion at the end of 2018, a 12 per cent year-on-year rise.15
Hong Kong, which has long served as China's international financial centre, is also taking important steps to stimulate ESG investing and maintain its global competitiveness.16 In September 2018, the Securities and Futures Commission (SFC) announced a strategic framework to develop green finance in Hong Kong. As part of this programme, the SFC said it was looking at ways in which asset managers can make clear to investors how and to what extent they factor environmental criteria into their investment processes and risk assessments.17 The SFC released a circular in April 201918 providing further guidance to management companies of SFC authorised unit trusts and mutual funds. This was designed to facilitate augmented disclosure and reporting of green-related investment products. The SFC also confirmed it would liaise with the Hong Kong Exchanges and Clearing about developing and promoting the listing and trading of green financial products such as bonds, indices and derivatives.19
Regulators in Singapore and Malaysia have given their backing to ESG as well. The Monetary Authority of Singapore (MAS) has said it wants to strengthen the country’s domestic green bond market, while it is also pushing for financial institutions to integrate ESG into their business models and reporting processes.20 Likewise, Malaysian regulators are very well placed to assimilate ESG into their domestic asset management industry, as there is a lot of overlap between the investment restrictions imposed on Islamic funds (of which Malaysia is one of the biggest markets in the world) and those which follow broader ESG mandates.21
The APAC transition to ESG: More work to be done
Despite the recent positive developments, more progress needs to be made to apply and incorporate ESG throughout APAC.22 For instance, ESG investing comprised just 0.8 per cent of all assets managed in Asia-ex Japan, and growth has been lacklustre with ESG AuM increasing by just 16 per cent between 2012 and 2016, the lowest anywhere in the world.23 Regional adoption of the PRI has also been poor. Of the 2,183 global signatories to the PRI guidelines, only 153 reside in Asia.24 Reinforcing this trend further, a survey by Refinitiv found 51 per cent of senior risk and compliance professionals in Hong Kong said ESG was not an area of focus in their jobs.25
The reasons for this ESG inactivity are multi-fold. Firstly, there is a lack of investor understanding about ESG26 and a general perception in parts of APAC that sustainable financial products are more expensive than traditional investments27. Many local investors also believe that companies or funds which score highly on ESG are more likely to suffer from underperformance.28 As many economies in APAC are classified as either emerging or frontier, the growth narrative – as opposed to the ESG story – is usually more important to the majority of regional investors.29 Exacerbating matters further is that corporates with weak ESG rarely face investor scrutiny, meaning they have very little incentive to reform.30
Even though there are a number of challenges, the overall ESG market and product pool offered by regional asset managers is expected to blossom over the next few years as they look to meet the growing investor demand and new regulatory requirements.
1 Oliver Wyman (2018) Driving ESG investing in Asia
2 Oliver Wyman (2018) Driving ESG investing in Asia
3 Oliver Wyman (2018) Driving ESG investing in Asia
4 Oliver Wyman (2018) Driving ESG investing in Asia
5 The Asset (January 9, 2019) Sustainable investment in Asia: Ready to take off
6 Japan Times (April 28, 2019) The Key to driving social investment in Asia
7 Japan Times (April 28, 2019) The Key to driving social investment in Asia
8 Japan Times (April 28, 2019) The Key to driving social investment in Asia
9 Citywire Asia (March 6, 2019) Asia is opening up to new types of ESG products
10 Investment Europe (December 17, 2018) Australia’s advisers keen on ESG investing
11 Financial Times (October 7, 2018) Shell pension fund challenged to disclose response to climate risk
12 Financial Times (September 18, 2018) Sustainable investing can propel long-term returns
13 Oliver Wyman (2018) Driving ESG investing in Asia
14 Oliver Wyman (2018) Driving ESG investing in Asia
15 Climate Bonds Initiative (2018) China Green Bond Market 2018
16 HK Financial Services Development Council (December 2018) ESG strategy for Hong Kong
17 Securities and Futures Commission (September 21, 2018) SFC announces green finance strategic framework
18 Securities and Futures Commission (April 11, 2019) SFC publishes guidance on enhanced disclosures for green or ESG funds
19 Securities and Futures Commission (September 21, 2018) SFC announces green finance strategic framework
20 Monetary Authority of Singapore (November 2017) “Singapore’s role in deepening regional green finance”
21 The Asset (December 20, 2017) Securities Commission Malaysia issues guidelines on SRI funds
22 Oliver Wyman (2018) Driving ESG investing in Asia
23 Oliver Wyman (2018) Driving ESG investing in Asia
24 Refinitiv (December 13, 2018) The rise of sustainable investing in Asia
25 Refinitiv (December 13, 2018) The rise of sustainable investing in Asia
26 Oliver Wyman (2018) Driving ESG investing in Asia
27 Fund Selector Asia (September 24, 2018) Expensive ESG products turn off HK investors
28 Refinitiv (December 13, 2018) The rise of sustainable investing in Asia
29 Refinitiv (December 13, 2018) The rise of sustainable investing in Asia
30 Refinitiv (December 13, 2018) The rise of sustainable investing in Asia