Fewer Asian investors than last year are convinced that integrating ESG metrics in their portfolios leads to more effective management of risks, an annual global survey of institutional investors and consultants by RBC Global Asset Management (GAM) has found. But that has not deterred Asian companies from incorporating ESG considerations in their investment approach.

The proportion of Asian investors that embraced ESG rose to 76% in 2021 from 72% last year, according to the 2021 RBC GAM Responsible Investment Survey, which polled 805 organisations across the world from May 11 to July 9.

“For those that provided reasons for incorporating ESG into their investment approach, the most popular reason given from Asia respondents was lower risks, increased returns, with fiduciary responsibility coming in second,” My-Linh Ngo, head of ESG iinvestment at BlueBay Asset Management, an affiliate of RBC GAM, told AsianInvestor.

Although 61% of the participants overall said ESG helps mitigate risk, this figure fell to 51% among investors in Asia.

CORRUPTION TOP RISK TO ESG

Corruption  topped the list of ESG risks among investors, followed by cybersecurity and climate change, the RBC GAM survey revealed. Ngo explained that investors are prioritising corruption risks as a result of wider concerns about governance and business ethics, particularly regarding public entities and stakeholders like government.

“There have been many high-profile cases linked to these in many emerging economies including those in the Asia Pacific region such as Thailand, Indonesia and India. For example, bribery linked to the use of personal connections to access public services, and vote-buying in national, regional or local elections being another,” detailed Ngo.

Investor alarm over corporate fraud in Asia has fed into their fears surrounding corruption in the region. Ngo cited the Luckin Coffee scandal in China last year, where the company admitted to falsifying over $300 million in sales, and the collapse of Singapore oil company Hin Leong Trading, whose founder Oon Kuin Lim is facing charges for fraudulent payments worth $2.23 billion, as prominent examples of corporate misdeeds that have spooked investors.

The survey indicated, however, that investor appetite for ESG-based investment will remain robust, as just over half the organisations polled said ESG integration in portfolios helps generate long-term sustainable alpha. At the same time, only 43% of Asia-based agreed with this view, 9% disagreed and 48% were not sure.

While there is heightened interest in and demand for ESG investments among the survey participants, they believe the market is not offering enough opportunities, with 44% saying there were not enough climate-related investment products to put money into. 

Asian investors were more negative on this point, with only 13% saying they had enough opportunities to invest in climate-linked products, in contrast to 22% of investors in Europe saying the same thing and 25% in the US.

REGULATION KEY TO ESG MARKET DEVELOPMENT

The regulatory impetus for ESG has been stronger in Europe than in Asia. In the first initiative of its kind by the bloc, the EU issued a taxonomy last year to help market participants determine which economic activities can be classified as sustainable. No group has got round to doing something similar for Asia. 

A total of 45% of European participants named government regulations as a reason for incorporating ESG, compared to 19% for Asia and the 13% that listed this as a cause globally.

But that does not mean that nothing is happening in Asia, according to Ngo. The regulatory or policy drivers in Asia for ESG adoption “may not be as visible as they are occurring on a national scale rather than regional, unlike what we see in Europe,” she noted.

“This may seem to have less impact as a result, but I’d say that not having a regional coordinated response could potentially be seen as an advantage, as what it may lack in scale is made up potentially in speed of implementation, potentially resulting in impact sooner,” she said.

The Asia Pacific region is starting from a position of higher carbon emissions and is vulnerable to transition risks, as well as physical climate change. It means there is investor interest in action, Ngo said.

Momentum for investments backed by ESG standards will accelerate in Asia as countries such as China, which has committed to reaching net zero carbon emissions by 2060, institute policy reform in this area. Strategies that promote investments in infrastructure and real estate, as well as those in fixed income, supporting sovereigns and corporates, will be popular among investors in Asia, Ngo said.

She pointed out that while investors need to take an active approach if they want to succeed at ESG investing, passive strategies such as ESG ETFs and indices will continue to grow in popularity in the region.

The survey found that 82% of organisations that use ESG criteria to invest, employ them in equities. Overall, 60% of the firms applied them in fixed income, and 41% did so in real estate.