Investors and the financial industry can select opportunities based on ESG impact
Asia is the dynamo of today’s global economy. But it lags behind the west in one critically-important regard: commitment to environmentally and socially sustainable investment.
The decades-long pursuit of economic development, which has seen the region achieve ever-higher living standards for billions of people, has paid too little attention to the environmental and social consequences. The result is the growing pollution of Asia’s air, water and land, and worrying increases in inequality.
This must now change, with governments, regulators, companies and consumers all playing their parts. And in this transformation, Asian investors, including the wealthy families that still control a lot of the region’s riches, have a critical role to play in expanding sustainable investment.
According to the Boston Consulting Group, the management consultancy, and the US SIF Foundation, an American financial industry forum for sustainable investment, $17.5tn out of the $79tn of total assets under management globally are invested in funds applying environmental social and governance criteria.
While this is a good start, it masks a wide regional disparity. In particular, East Asia lags behind the rest of the world, with only 5 per cent of assets under management invested in sustainable projects according to Global Impact Investing Network. That compares with nearly 30 per cent in the US and Canada.
Given Asia’s potential to increase still further its share of global economic output, investment projects and investable wealth this gap matters not only to Asians but to everyone.
And precisely because Asia has the opportunity to grow further, it has plenty of scope to transform its priorities, adopt ESG targets more firmly, and become the world leader in sustainability.
In particular, as the Indo-Pacific region becomes increasingly urbanised, its growing cities will require significant investments in infrastructure, from transport to power and waste management.
Awareness of the power of sustainable finance has, however, been slow to develop in Asia, partly because of the short-term view many Asian investors have historically taken. Environmental, social and governance standards are only just becoming understood as meaningful principles within the business community. The perception of ESG as a gospel preached by well-meaning but interfering non- government organisations has a strong hold in a region where many countries have understandably been focused on rapid economic development.
This is where investors and the financial services industry come in. By selecting investment opportunities based on their positive ESG impact, they can ensure that sustainability is placed at the heart of regional development.
Fortunately, the situation is beginning to change. In Japan, for example, MUFG — one of the world’s largest banks — announced in 2019 that it was reversing its policy on investing in coal-fired power generation projects. And the number of mainland Chinese financial institutions and companies signing up to the UN’s Principles for Responsible Investment tripled between 2017 and 2018 to 22, according to the 2019 annual report of the United Nations-backed Principles for Responsible Investment, an investor network.
But much more needs to be done. For the full potential of sustainable investment to be realised across Asia, certain barriers need to be removed. We should start with education since the uninformed investor will invest little or nothing in ESG.
Currently, the benefits of sustainable investing are communicated in a language full of industry acronyms that are hard to comprehend. This makes it difficult for investment professionals to understand its importance.
While there are signs that things are improving, to get the understanding required we need educational tools and materials that explain the benefits and power of sustainable investing in a clear, concise and coherent way.
Only then will Asia’s asset managers, from big banks right through to the plethora of family offices, understand why they need to put sustainable investment at the heart of their strategies.
Part of the problem is the lack of access to hard data on the benefits of sustainable investing. According to Morningstar, sustainable US Large Blend Funds, which are equity focused, outperformed the S&P 500 by 40 per cent in 2018, compared with just 25 per cent of all large blend funds.
While data like this prove there are serious returns to be made in sustainable investments, and that they therefore make good business sense, generally speaking information is fragmented and not easily integrated into investment models.
Investors need reliable data before taking the plunge into a new strategy, particularly if we are to persuade Asia’s growing community of high net worth individuals to participate actively in sustainable investing.
We need global data sets they can easily incorporate into their investment planning. This will help demonstrate the value of sustainable investing and debunk the myth that it yields weak returns.
To bridge the divide between the potential and the actual we also need platforms, aided by new technology, that connect investors with experts and opportunities.
Nearly every industry is being transformed by innovation, and financial services is no exception. Fintech is a huge industry, and one in which Asia already plays a leading role. As well as challenging the status quo in banking, it can create the right conditions for sustainable investing. For example, blockchain technology could be used to make ESG data more visible and reliable.
All this needs to be supported by the right regulatory environment. Regulators are important agents of change in any industry, but especially so in finance.
For example, Hong Kong’s Securities and Futures Commission has arguably led the way globally, making it compulsory for listed companies to disclose all their sustainability credentials. Mainland China will soon follow suit, requiring all listed companies to report their ESG risks from 2020 onwards.
Asia is emerging as a world leader in many fields, and sustainable investing should be one. All the ingredients are there: increasing levels of investable wealth, large numbers of projects to invest in and an increasingly supportive regulatory environment. The social need is there too, with rapid urbanisation. By removing the obstacles currently hindering investors’ full participation, the financial services industry can become a catalyst to help make sustainability the new norm.
Helene Li is chief executive and co-founder of GoImpact, a sustainable-investment consultancy, and Curtis Chin is a former US ambassador to the Asian Development Bank