Only a minority of institutional investors in the Asia-Pacific have so far parked money in funds that incorporate environmental, social and governance (ESG) principles, but things are changing fast, a comprehensive new study shows.
According to a global survey by BNP Paribas released on Tuesday, most of them plan to substantially boost their ESG allocations over the next few years.
“We’ve come from a low base in ESG in Asia Pacific but nevertheless the commitment is there,” said Madhu Gayer, investment analytics and sustainability manager of BNP Paribas Securities Services.
Currently, only 20% of institutional investors in the Asia-Pacific region have a majority of their investments in ESG-compliant funds, which is only slightly below the global average. However, that looks set to jump to 59% in two years's time, based on their responses to the survey, which is significantly higher than in either North America or Europe.
BNP Paribas polled 347 institutional investors with trillions of dollars of assets under management, including 110 in the Asia-Pacific region made up of 54 asset managers and 56 asset owners.
The Asia-Pacific investors canvassed by BNP Paribas are also looking to invest in their ESG capabilities. Over the next 12 months, 48% of them indicated that they plan to hire employees with ESG skills or to increase their pool of external ESG consultants, more than in either Europe or North America.
Almost six out of 10 Asia-Pacific respondents said improving long-term returns was a reason for incorporating ESG in their investments, and 70% – more than any other region – believe their ESG portfolios will outperform over the next five years.
“ESG is now seen as a differentiator in quality investments in the long term,” Gayer said at an accompanying press conference in Singapore.
REGULATION AND REPUTATION
Nearly two-thirds of those surveyed said increased regulation was a reason for dedicating more resources to ESG, while 51% cited brand image and reputation.
More than four in 10 Asia-Pacific respondents said benchmarking funds against an ESG index had the greatest impact on their sustainable investment strategies, echoing the launch in January of FTSE Russell's Chinese Green Bond Index Series.
Another 36% said investing in green bonds had the most impact.
“Green bonds are definitely a key part of the investment strategy in Asia Pacific,” Gayer said.
Last year, Asia Pacific achieved the highest regional year-on-year growth of green bond issuance at 35% and had the second-largest 2018 volume at nearly $37 billion after Europe, according to the Climate Bonds Initiative (CBI), an international organisation that promotes green bonds. The top-three Asian-Pacific issuers last year were China ($31 billion), Australia ($4.2 billion) and Japan ($4.1 billion).
CBI forecasts that global green bond issuance will hit $250 billion in 2019, 49.4% more than the $167.3 billion issued in 2018.
It was a different picture two years ago when ESG was an even less important factor for the region's institutional investors.
A survey in 2017 commissioned by HSBC of 497 investment chiefs at asset management firms around the world found only 27% of Asian investors integrated ESG into their investment strategies. This compared with 35.2% in the Americas and 74.2% in Europe.
Likewise, a report in the same year by the Global Sustainable Investment Alliance said that in Asia excluding Japan, $52.1 billion of funds were managed with responsible investment strategies, far less than the $12 trillion in Europe, $8.7 trillion in the US and $473.6 billion in Japan.
This is no time for the region to pat itself on the back because of the change in attitudes reflected in the new BNP Paribas survey.
“While Asia’s optimism in terms of asset allocation to ESG may not come as a surprise as multiple Asian markets, not least China, have pushed for increased market regulation surrounding ESG disclosures, challenges such as transforming disparate data sets into actionable insights and technology costs hinder actionable insights and technology costs hinder progress," Gayer said.
