Asia Pacific asset owners have shown the strongest enthusiasm for sustainable investments in private equity and infrastructure compared to their global peers, according to a recent FTSE Russell survey.

The global asset owners sustainable investment survey released earlier this month has found that more than 38% of Asia Pacific asset owners have implemented sustainable principles in their private equity portfolios, surpassing the global average of 27%, and the 33% in Europe, Middle East, and Africa (Emea).

Similarly, Asian asset owners have a stronger appetite for sustainable investment in infrastructure, with 35% having adopted sustainable considerations in their infrastructure portfolios, higher than the 26% global average.

Source: FTSE Russell (Click for full view)

“This is likely to reflect two key factors: greater potential risk exposure to ESG issues from private equity and infrastructure assets; and in the case of private equity, the ability to influence and manage risk management practices through ownership structures,” noted Helena Fung, head of sustainable investment, APAC at FTSE Russell.

“In addition, there is a recognition of the scale of the investment opportunities that exist in these two asset classes in terms of the need to accelerate decarbonisation efforts at a greater pace in Asia,” Fung said, noting that large companies’ carbon neutrality targets have brought about investment opportunities in both the public and private equities space.

Helena Fung, 
FTSE Russell

According to Preqin data in June, Asia Pacific is leading the world in the growth of alternative investments, with assets under management (AUM) approaching $2 trillion as of the report’s publication, and reaching $6 trillion by 2025.

“ESG, and in particular environmental risks, can be a significant source of concern to investors, along with changing environmental regulation, so ensuring that general partners (GPs) have strong policies in place to assess and manage these sources of non-financial risk is a primary concern for institutional investors,” she added.

Overall, sustainable investment allocations are more prevalent in public equity than other asset classes globally, with 46% of all asset owners surveyed having implemented sustainability considerations in their stock portfolios.

However, public equity is the only asset class where Asia Pacific asset owners have yet to catch up with their peers. Compared to Emea, where 69% of asset owners have adopted a sustainable approach in their stock investments, only 44% of those from Asia have done the same.  

“Although it is hard to generalize across Asia Pacific due to regional differences, as an index business we have seen a number of large Asian pensions and sovereign wealth funds start to take the initial steps towards implementing sustainability criteria into passive global and domestic benchmarks,” said Fung.

“Many European pension funds, for example, have significant pools of passive investment and have a longer history of implementing responsible investment across their holdings, so the gap here, at least for now, is not surprising. We would expect to see this situation alter over the next three to five years.”

DIFFERENT FOCUS

Globally speaking, asset owners in Europe (97%), United Kingdom (90%), and Asia Pacific (88%) demonstrated the strongest appetite for sustainable investment. By contrast, less than half (45%) of asset owners in the United States could say the same.  

Source: FTSE Russell (Click for full view)

In Emea and Asia, the primary sustainability focus area was climate or carbon, whereas in North America they were social themes and governance.

The top motivations for Asian asset owners in implementing or considering sustainable investments were: mitigating long-term risks as well as avoiding reputational risk, followed by societal good and regulatory requirements.

Source: FTSE Russell (Click for full view)

Notably, regulatory requirement was the least considered rationale globally (31%). Among Asia Pacific asset owners, regulatory requirement is fourth on the list (54%).

Specifically, Asian asset owners have demonstrated the highest demand in regulatory advancement in ESG risks reporting, disclosure and green taxonomies. 

Source: FTSE Russell (Click for full view)

The FTSE Russell survey was conducted between February and early April this year. It polled investment professionals at 179 global asset owners, including 19%, or 34 asset owners in Asia Pacific.

In terms of the makeup of the respondents, 42% were pension funds or plan sponsors while 18% were insurance companies. The rest were government organizations or endowments, sovereign wealth funds, family offices, and others.

Among the 179 global asset owners, 76% had over $1 billion in AUM, including 46% that managed over $10 billion.