Sustainable investing trends and landscape in APAC

Environment, social, and governance (ESG) or, more broadly, the sustainability investment landscape in Asia differs from other markets. Much of those differences stem from the terminology used in the APAC region. “Sustainability” or “responsible” investing means different things in different markets. The lack of standardization across the region complicates the investment landscape. Different markets and regions within Asia have developed their own taxonomy catering to domestic needs. There is no single regional regulatory entity like the EU to drive the convergence of different taxonomies and reporting standards.

In addition, regarding data disclosure in Asia, there is a lack of consensus within the region to require companies to provide standardized disclosure. This inevitably leads to the incomparability of ESG data for different markets, making it more challenging for international investors to increase the allocation of assets related to ESG and sustainable investments for Asian markets.

Within the ESG investing realm, there are some positive developments in risk disclosure related to environmental factors, particularly regarding climate risk disclosure. For example, scopes 1, 2, and 3 related to carbon emissions will soon be required for a company’s climate risk disclosures.

In addition, some international reporting standards, such as the Task Force on Climate-related Financial Disclosures (TCFD) reporting, are gaining traction as industry standards for reporting of climate-risks at the portfolio level. These efforts to ensure consistent disclosures and reporting will make comparing climate-themed investment strategies easier.

Despite these challenges, there is a growing recognition of ESG and sustainable investing in Asia. Many studies have shown that ESG factors can impact financial performance, and investors are increasingly incorporating these considerations into their investment decision-making process.

Revisiting ESG Allocations

In recent years, the majority of assets under management (AUM) inflow to ESG exchange-traded funds (ETFs) has been benchmarked against ESG indices optimized with low tracking error against market indices. The influx was primarily driven by increasing awareness of ESG risk exposure, and most of the inflow was not targeted at a specific segment of ESG exposure.

However, thanks to the continuous educational effort by asset managers and ESG data providers worldwide, retail and institutional investors have access to more information related to ESG investing, and they are demanding more dedicated ESG investment strategies.

For instance, in the fixed-income space, investors focus on the “use-of-proceeds” (i.e., green bonds, social bonds, etc.) instead of applying equity-like screening filers at the bond issuer’s level. This illustrates that investors concerned about specific ESG risk exposure expect more dedicated ESG investment solutions that will deliver the desirable investment outcomes.

The Demand for ESG-Related Investments and Insight

As demand for ESG investments grows and more data becomes available to inform investors’ interest and investment decisions, the sector is evolving quickly. The development of new and innovative ESG-themed financial instruments further fuels the demand.

Consequently, cutting-edge sustainable investment strategies are being researched, developed, and launched at a fast pace by asset management firms. Instead of focusing on traditional metrics during the fund selection, investors increasingly focus on how a particular ESG fund can deliver a desirable investment outcome consistent with the principles and goals enshrined within ESG-related investing.

Given the evolving nature of ESG investments and taxonomies, constructing ESG indices requires intensive data collection and management expertise. The intelligence analysts gather helps to ensure the indices will deliver an expected investment outcome and avoid investments into controversial investments such as those involved in “greenwashing.”

Gaining Traction with Investors

“ESG investing is evolving at a fast speed, and the process of standardization related to different areas within ESG, such as reporting and taxonomies mapping among regions, will continue at full speed over the next few years. This will equip investors with more comparable information and data points for evaluating the suitability of ESG products within their asset allocation portfolios,” said Dennis Fok, Head of Fixed Income Portfolio Management, ETF at Mirae Asset Global Investments (Hong Kong) Limited. “Nonetheless, education from different stakeholders within the financial industry remains key to promoting confidence in ESG investing.”

Mirae Asset Global Investments (Hong Kong) Limited launched the world’s first green bond ETF focus on Asian Ex-Japan and its first fixed income ETF, the Global X Bloomberg MSCI Asia Ex Japan Green Bond ETF.

To launch ESG ETFs which can gain investor acceptance and be recognized globally, ETF issuers can  partner with international index providers. Bloomberg has a track record of implementing indexing ideas and invests heavily to gather, analyze, and make relevant data available.