Asia fund industry lagging on climate risk awareness

If asset managers and owners in Asia are to incorporate climate risk into their investment modelling processes, they will need more regulatory certainty on the issue, say consultants.

Most of the world's largest investment managers are not factoring climate-related trends into their investment decision-making, concludes a report published last week by Boston-based research firm Ceres. The findings appear to reflect the situation in Asia, according to investment consultants at Mercer and Watson Wyatt.

Mercer has been working on climate change-related projects with the International Finance Corporation (the private-sector arm for the World Bank), for example. As a result, the firm's executives have discussed related issues with asset managers and institutions in countries including China, India, South Korea and Taiwan.

"We have found the responses to be quite varied," says Helga Birgden, Asia-Pacific head of responsible investment at Mercer in Sydney. As for concrete action, there is not a lot of evidence of asset managers and institutional investors incorporating climate risk into their investment and modelling processes. But that is perhaps not surprising, she says, given that such firms need suitable investment models and processes, regulatory frameworks and so on.

The high level of policy and regulatory uncertainty around climate change is core to the issue. Mercer is working to help institutions and asset managers understand the importance of climate risk and set out what it means for their businesses, says Birgden. The consultancy is seeking to help firms come up with reasonable scenarios for climate risk, "because current standards and risk-modelling tools may not be enough".  

"From our point of view, we see a variety of approaches," she adds. "But there's still a lot of work to be done by managers and asset owners as to how they're going to model such scenarios that will give them insight into a future carbon economy."

Specifically with regard to China, the country has been developing policy on the climate front, since it will affect economic development in the long-term, says Jia Xinting, responsible investment specialist at Mercer in Sydney.

"In terms of how the Chinese investment world is responding, they are starting to look at climate change as part of the ESG [environmental, social and governance] factors as part of investment analysis," she adds. "But without a trading scheme, specific costs associated with carbon solutions or a framework in that direction, it may take a while for managers to take that into account in their modelling processes."

Others take a similar view. "Our experience in Asia is similar to that described in the Ceres report," says Naomi Denning, Asia-Pacific head of investment consulting at Watson Wyatt in Hong Kong. "Most managers are still in the early stages of considering and/or integrating any climate change risks into their investment process. The only managers that really stand out are those already developing or offering products specialising in this area."

Still, some asset managers and private banks do focus on sustainable investing. Switzerland's Bank Sarasin, for example, now requires clients to opt out if they do not want to take this approach.

But Asian fund managers are slower on this front and have not been paying as much attention to what has historically been branded socially responsible investing (SRI), adds Denning. A lack of regulation on this front is a factor. In the UK, for example, pension funds are required to make a statement on their stance on SRI, she notes, but there's no such requirement in Asia.

Moreover, institutions elsewhere, such as the California State Teachers' Retirement System, are a lot more aware of people looking to them for investment best practice, says Denning. Asian funds are not looked at in the same light in terms of leading the way.

"Also, we don't hear corporate pension funds in Asia raising this as an issue," she adds. "They may throw it in with other questions, and ask 'are we doing anything on this?', particularly if they are looking at climate issues from a corporate perspective. So it may be on their list as something to think about at some point, but it's not really getting to the top of the agenda yet."

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