A new era of sustainable investing in Asia is driven by several factors, including the transfer of wealth to a more socially conscious generation. How can the region ensure that ESG is central to both investment and risk management decisions?
- Although ESG in Asia is gaining traction, the pace of change is piecemeal as investors often lack the data — or the regulatory pressure — to make decisions with an ESG lens.
- With 35 percent of the region’s wealth set to change hands in 5-7 years, the next generation of socially conscious investors will be key to the rise of sustainable investing in Asia.
- Our ESG data and indices cover more than 1,100 companies in Asia, and have been used, in partnership with BlackRock, to launch the industry’s first inclusion and diversity ETF.
Globally, more than a quarter of financial assets under management come with a mandate to incorporate Environmental, Social and Governance (ESG) factors, driven predominantly by European investors, companies and regulators.
In Asia, excluding Japan, less than one percent of managed assets in 2016 were devoted to ESG, and while the region has begun to take note of the benefits of ESG investing, the pace of change has been glacial.
In fact, Asian signatories to the UN Principles for Responsible Investment number just 153, out of a global total of 2,183.
During a panel discussion I led at the recent 2018 Pan Asian Regulatory Summit in Hong Kong, we surveyed senior risk and compliance professionals on the influence ESG had on their role. Only four percent indicated that ESG made up a large portion of their responsibilities, with 51 percent stating it was not a focus in their job at all.
The ESG landscape in Asia
Investors in Asia tend to believe they must choose between either “doing good” or maximizing profits. Meanwhile, the region’s private investors and family-run firms often prioritize philanthropy and charitable foundations as a primary means to deliver social impact.
The region is also home to many emerging and frontier markets where investors have traditionally zeroed in on growth and short-term profits. In addition, companies often don’t have the resources and expertise to interpret the data and differing standards on ESG.
These issues are underscored by the lack of repercussions for corporate inaction on ESG when compared with other countries, particularly in Europe. Fortunately, there are signs that regulators and influential investors are aligning their focus to the importance of sustainable investing in Asia.
For example, the decision by the Japanese Government Pension Investment Fund — the world’s largest public fund investor — to sign up to the UN’s responsible investment rules in 2015 galvanized the investment industry in Japan on the issue.
In Hong Kong and Singapore, stock exchanges have in the past two years made ESG reporting mandatory for listed companies on a “comply or explain” basis.
Voluntary stewardship codes or similar ESG initiatives exist in Japan, South Korea, Taiwan, Hong Kong, Thailand, Malaysia, and Singapore.
These steps have made it much easier for investors to analyze information from companies — and note those which don’t volunteer it — although in some cases lack of depth and verification challenges the reliability of the data.
Watch: What regulatory change will have the biggest impact on financial markets in Asia?
Socially conscious investors
Business leaders and investors are concerned that issues such as climate change, diversity, geopolitical instability and income inequality will pose equally significant, if not greater, challenges to companies’ long-term prospects as economic growth rates.
To prosper in this complicated environment, companies need to, as BlackRock’s Larry Fink put it in his annual letter to CEOs, “not only deliver financial performance, but also show how it makes a positive contribution to society.”
The pressure for companies to serve a social purpose is just as acute in Asia as elsewhere.
India and China are battling toxic air pollution; income inequality is deeply entrenched in many parts of the region; and women comprise a tiny fraction of board seats in places such as Japan and South Korea.
The rise of social media and the growing number of activist investors in the region mean that these destructive and discriminatory behaviors can have a significant financial and reputational cost.
Asia’s demography is likely to be a key factor in propelling the region to the forefront of the growing demand for ESG investments.
Research by Morgan Stanley found that such investments appeal to a younger generation of socially conscious investors, and with 35 percent of Asia’s wealth expected to change hands in the next five to seven years, ESG is going to be a hard trend for financial institutions in the region to ignore.
Investing with an ESG lens
Newly-devised data sets and tools are making it easier for investors to make more responsible investment decisions, and for financial institutions to offer bespoke ESG products.
Refinitiv has collated ESG data and scores on more than 70 percent of global market capitalization and history, dating back to 2002, including over 460 companies in Japan and more than 700 in the rest of Asia.
The data was used to compile a range of indices, including the Global Diversity and Inclusion Index, which identifies the top 100 publicly traded companies with the most diverse and inclusive workplaces, and to launch, in partnership with BlackRock, the industry’s first inclusion and diversity ETF.
While Asia’s landscape might not be as mature as Europe, there are signs the region’s companies and financial institutions are beginning to take ESG very seriously.
Even in China, which has in the past been considered one of the more challenging markets for investors, a senior official from a major Chinese investment management firm has recently stated that “ESG is no longer a secondary, but the primary screen.”
This important statement gives me confidence that in the next few years we are likely to see the business and investment case for ESG grow deeper roots, heralding the dawn of a new era for sustainable investing in Asia.
Incorporating ESG into risk management
As I spend more time personally focusing on the issue of ESG, I realize that it is not just limited to social impact investing, but is increasingly an important factor for effective corporate governance and risk management.
Considering that a negative environmental or social footprint can send companies’ stock prices on a downward spiral, investors and risk officers need to take ESG criteria into account when calculating investment and supply chain risks.
At Refinitiv, we see the lines between our ESG and Risk propositions being drawn more closely together as ESG becomes a deciding factor in both investment and risk management.