Institutional investors in Asia Pacific have become the most willing globally to incorporate environmental, social and governance (ESG) strategies into their investing, according to new research conducted by BNP Paribas.
The new survey, Great Expectations: ESG – what’s next for asset owners and managers, showed 84% of regional investors adopting ESG guidelines, after canvassing 461 asset owners and fund managers from across the world, with a total of $5.4 trillion in assets under management.*
Compared with the 135 Asia-Pacific institutions surveyed, with AUM of $1.4 trillion, 82% and 70% of the respondents in Europe and North America, respectively, said they currently incorporated ESG into their investment decision-making.
Asset owners in Asia also seem set to engage further with ESG, with over 60% of respondents from the region saying they plan to market most of their funds as ESG-compliant within two years, versus the 20% that do so today.
The high level of engagement by regional asset owners looks somewhat surprising, given that ESG is still gaining ground in many Asian countries. In contrast, many Scandinavian and northern European asset owners have been ESG pioneers for several years.
Madhu Gayer, BNP Paribas Securities Services’ head of investment analytics for Asia Pacific, told AsianInvestor that the finding was slightly surprising, but positive.
He added that the level of respondent engagement might simply be because such a survey hadn’t been done before.
“If you break it down it’s logical. China is the biggest issuer of green bonds and it has introduced policies all [the] way [down] from the top over green energy. Singapore has been announcing green schemes, Malaysia pension funds are moving to ESG across all investments too, while the United Nations came up with 17 sustainable development goals and India has mapped out exactly which ministries need to meet each one, and who must do what,” Gayer said.
He added that he believes regional investors have increasingly been interested in the ESG concept and have added it incrementally to their investment processes.
“We wanted to learn more about how asset-manager and asset-owner business models are changing, and what was driving their moves into areas like alts and emerging markets,” he said. “And we saw the topics of sustainability, E, S and G becoming constants in these conversations.”
Other notable results from the survey include the fact that environmental considerations stood among the highest with regional respondents. Forty-six percent of Asia-Pacific investors said they were the most important, compared with 29% for corporate governance and 25% for social concerns. And while 34% of Asia-Pacific funds currently incorporate ESG considerations, respondents predicted that this would grow to 57% in two years, ahead of other regions.
This might make some sense, given the increasing media coverage that environmental damage and pollution is getting across the region. China, in particular, has greatly increased its desire to encourage green financing, as domestic discontent over air and water pollution has risen.
“On a global basis the environmental issues are seen as the one potentially impacting returns the most but it’s also the most challenging [to plan for],” noted Gayer. “Of course everybody does governance to some degree, so the impact on return potential is not seen as being as great, but the cost implementation is lower. The ‘S’ is much more ambiguous to most investors.”
While ESG appears to be gaining traction among regional asset owners, the survey’s respondents said a lack of robust data was the biggest hurdle to increasing its incorporation into investment processes. However, they remain remarkably sanguine that this will change, with only 9% saying they thought data collection would still be a barrier to more ESG incorporation in two years’ time.
That’s a projection that Gayer found to be rather optimistic. “I want to see that happen, but it’s not all that likely,” he said. “All jurisdictions operate differently and nobody is saying ‘here are our reporting standards,' or ‘here are our measurement standards’ yet.”
The desire of asset owners to gain more ESG exposure comes at a time they are increasingly seeking to invest across more asset classes. The upshot is environmental, social and governance factors are likely to become more important to institutional investors as they consider their illiquid investments.
Applying ESG to alternative investments can present a challenge. Publicly listed companies have to offer a large amount of data about their operations and shareholders can raise issues and questions at annual general meetings. Bond issuers also have to promise to offer data on their balance sheet health and abide by other covenants in order to borrow money from investors.
In contrast, private equity funds, hedge funds and real estate investments tend to be illiquid and non-transparent, in part because these areas often rely on privately negotiated deals to make their investments.
However, Gayer said he was confident that asset owners could increasingly work with private equity funds, as either co-investors or influential limited partners, to help get them to improve the ESG capabilities of the companies they invest into.
Additionally, the desire of institutional investors to incorporate more ESG across asset classes is forcing asset managers to reconsider their business models. Gayer believes it will foster more ESG across all types of asset investing, including alternatives.
“Asset managers are seeing the model is changing and they are having to change with it,” he said. “For example, Japan’s GPIF (Government Pension Investment Fund) is a great poster child for the movement, with [chief investment officer Hiromichi] Mizuno saying ‘We have $1.3 trillion in assets, and it will all become ESG’. That forces asset managers to change how they conduct funds to if they are to get business from them."
“GPIF is a bit of an outlier because it can’t invest funds itself," he added. "But some sovereign-linked funds in Asia can, and they are seeking private equity, private debt and infrastructure especially, and more co-investment and co-innovation projects. All of that goes hand-in-hand with engagement stewardship, whether they do it by themselves or conduct it with partners.”
* The BNP Paribas survey gained responses from Australia, China, Hong Kong, Japan, India, Malaysia, New Zealand, and Singapore.