Asia’s financial industry is slowly adapting the environment, social and corporate governance (ESG) practices. ESG investing opportunities within Asia are backed by the rapid rush to bolster the ongoing ESG momentum, in recent years.
Major financial hubs from Asia are trying different approaches and methods used to incorporate ESG factors into the investment process. Stock exchanges, financial regulators, central banks, and industry organizations from the region have been making efforts to encourage, regular and meaningful ESG disclosure from companies. Besides this, they have also focussed on the fair treatment of consumers and shareholders. Refinitiv Lipper data shows that Asia ESG funds’ assets under management have continued growth in recent years, especially in Q3 2020.
ESG integration has become a part of investment management. Global investors are getting increasingly aware of the significance of environmental, social, and corporate governance (ESG) factors. The amount of ESG investing assets managed by fund managers globally rose to $31 tn in 2018 from $23 tn in 2016, as per data by Global Sustainable Investment Alliance (GSIA).
Why is ESG investing rising in Asia?
Growing environmental awareness has been drawing investors to ESG funds. Climate change has also helped focus ESG attention on Asia. Further, Paris Agreement-led initiatives have triggered ESG appreciation in Asia.
As the global economy tries to recover from the pandemic, the year was a turning point for the Asian ESG industry. Yet the interest in ESG investing was already there before the pandemic. The spread of the virus has made ESG even more of a pressing topic. Climate change is expected to hit Asia the hardest, McKinsey & Company suggests. In 2020, corporate boards also dealt with Covid-19 related governance challenges. Companies with higher ESG scores have outperformed the laggards both before and during the crisis, as per Fidelity research.
Apart from providing relevant information for investors to evaluate, ESG considerations are central to business and economic success as they can affect a company’s operations and profitability. It helps signal various operational efficiency as well as in lowering costs. Therefore, companies have been further drawn towards E&S issues, better sustainability reporting, and ESG leadership.
ESG spotlight can help in reduced environmental liability, opportunities for low-carbon revenue sources as well as future costs in the face of regulatory changes. Analysts suggest companies that meet ESG standards are more likely to experience prolonged growth.
According to Sheldon Chan, Portfolio Manager at T. Rowe Price, the integration of ESG factors into investment decisions has gained recognition as an important method of downside risk management and a driver of risk‑adjusted returns.
Asia still low on ESG integration
Compared to the west, ESG activity is relatively slower in Asia, but the ESG momentum continues to pick up. “We see that strong economic growth and policy support allows Asia to stand out as a compelling investment proposition for ESG. The investments into Renewable Energy, for example, have seen industry leaders emerge in Korea, China and India,” said Yong Hong Tan, Credit Analyst from Eastspring Investments.
The demand in Asia is likely to continue its upward trajectory as both institutional and retail investors are looking for ESG investing. And thus, the asset management industry has become a key to promoting this transition towards sustainability via ESG investing.
In the following weeks, we will focus more on the topic of ESG investing in Asia.