Asia behind in sustainable investments, but attitudes are changing, industry leaders say
- Sustainability a ‘slow-moving, unstoppable train’ for investor portfolios, according to Willis Towers Watson
- China to require listed companies, bond issuers to disclose environmental, social risks beginning next year
Asia lags behind Europe and other regions in constructing investment portfolios that consider environmental and social factors along with returns, despite rising demand for such products among investors globally, according to industry leaders.
But, that is beginning to change as more and more funds are shifting to so-called environmental, social and governance (ESG) strategies in Japan, and China will require listed companies and bond issuers to disclose environmental and social risks in their businesses beginning in 2020, they said.
“You, as an investor, have to account for how much good or bad sustainability is in your portfolio,” Roger Urwin, global head of investment content at global advisory and insurance firm Willis Towers Watson, said. “Sustainability, defined this way, is a very, very slow moving, but unstoppable train that is starting to pick up pace. There is no way this thing is going to turn around on itself, this is no fad.”
Urwin, who co-founded the investment research non-profit Thinking Ahead Institute, said sustainability among investment firms in Asia is “quite spotty”.
Some US$30.7 trillion was invested in sustainable and responsible investment products at the beginning of last year, with nearly half of the professionally managed investments worldwide coming from Europe, according to the 2018 Global Sustainable Investment Review.
But, the biggest growth globally last year was in Japan, where sustainable investing assets quadrupled from 2016 to 2018, according to the review. That has been driven in part by initiatives by the Government Pension Investment Fund, one of the world’s largest pension funds, and the country’s Pension Fund Association.
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“It seems that the focus is on returns and the risk is kind of secondary [in Asia],” Hortense Bioy, director of passive strategies and sustainability research for Europe at Morningstar, said. “It’s like what can give me the biggest return? And there is also this very short term, more short term kind of mindset … It’s not about the long term. People who are investing are people who already have money, so the relationship with money is different.”
Asia is also coming from a “different starting point” and has to address other population and developmental issues before it can fully focus on sustainability, said Jayne Bok, head of investments for Asia at Willis Towers Watson.
As of June this year, there were nearly 2,900 ESG-linked funds globally with about US$890 billion in assets under management, with the bulk of the funds domiciled in Europe, according to Morningstar. China and Hong Kong had 29 funds combined with about US$4 billion in assets under management.
Bioy said Asian countries – and China in particular – realise they have to do something when it comes to the environment and are implementing regulations to increase disclosures of environmental and social risk. There also is a “growing interest” among investors in the region.
She said thematic investing products – namely those built around environmental sustainability – have proved more popular among Chinese investors.
China also has been a growing force in recent years in “green” bonds, which are used to fund climate and environmental projects, said Val Smith, chief sustainability officer at Citi.
“As I travel around to different markets, every market has legitimate indicators of leadership,” Smith said. “When you look at the green bond market, for instance, issuances that Citi has led this year in green and social sustainability bonds, the Asia-Pacific market has been very strong.”
Some US$21.8 billion of green bonds were issued in China in the first half of this year, a 62 per cent increase from the year-earlier period, according to the non-profit Climate Bonds Initiative. There were US$117.8 billion of green bonds aligned with international definitions issued globally in the first half of 2019.
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Citi itself has committed to lend and invest US$100 billion by the end of 2023 in projects that combat climate change and provide other environmental benefits. In the past five years the company has nearly surpassed its goal, lending and investing US$95.3 billion and is in the process of setting its next goal, Smith said.
“Investor demand is increasing,” Smith said. “As a bank, we see client demand increasing. Increasingly, employees are demanding that their companies are more sustainable.”
Smith said the bank is assessing not only climate risk – such as meeting carbon emissions goals – in its lending process, but also how to assist clients with transition financing for the future.
For now, Europe stands way ahead in the game – where investors are aligning portfolios with the United Nations’ 17 sustainable investment goals – while America is behind and Asia in-between, Urwin said.
“Europe has quite a strong solidarity, cultural feature, where corporations have always been encouraged to take a pro-social point of view,” Urwin said.
“That political drive to make capitalism very pure has meant that the US has had a great deal of difficulty adapting its corporations to a more sustainable future,” he said.
