Interest in sustainable investing is improving among Asia’s wealthy investors and driving the introduction of more sophisticated product offerings incorporating environment, social and governance (ESG) principles, wealth managers told AsianInvestor.
Nevertheless, the pace of adoption of ESG-focused investment strategies remains slow compared with other parts of the world.
Apart from individual stock selection and mutual funds, high net worth individuals are graduating towards having portfolios focused on ESG investing, according to wealth managers.
“We won our first request for proposal for an ESG mandate from an Asian family office late last year,” Garth Bregman, head of managed investments for Asia at BNP Paribas Wealth Management, told AsianInvestor. He added that the mandate requires creating a portfolio that invests entirely in equities but did not provide any further details on the mandate.
Investing in a socially responsible manner can take various forms, from simply screening out “sin” sectors such as tobacco, gambling, and weapons industries to the positive selection of shares in companies seen to be leaders in ESG practices.
Building sustainable investment portfolios via listed equities/mutual funds has been the more typical route for private wealth clients, according to wealth experts, but more advanced offerings are entering the market now.
In early April, for instance, UBS launched a fully sustainable multi-asset portfolio for discretionary mandate clients in Asia. The portfolio will use three strategies -- yield, balanced and growth – to invest across World Bank bonds, green bonds as well as ESG-focused corporate bonds and equities.
It’s a portfolio that was previously available to institutional clients only and is now being made available to private wealth clients, Mario Knoepfel, head of sustainable and impact investing advisory, investment platforms and solutions for Asia Pacific at UBS Wealth Management, said.
AsianInvestor has previously reported that growing institutional appetite for ESG-based investment strategies in Asia is leading to more product innovation for private wealth clients as well.
Knoepfel said that awareness about ESG and sustainable investing had improved over the past three years. "Earlier, clients didn't even know what ESG meant, but now we are seeing more queries directed at advisors by clients about sustainable and impact investing and how they can go about it."
Nevertheless, the fact remains that responsible investing doesn’t come naturally to Asian investors and companies, which is why governments continue to play a lead role, panellists said at an AsianInvestor ESG Investment in Asia forum held in Hong Kong on March 13.
Only 0.8% of the total managed assets in Asia are considered sustainable investments, compared with nearly 53% for Europe and 22% for the US, according to the 2016 Global Sustainable Investment Review.
Even BNP Paribas WM's Bregman acknowledges that ESG is not currently driven by mass client demand. "But we want to be at the forefront because that demand is coming."
RETURNS VERSUS DOING GOOD
Part of the reason why sustainable investing has been slow to take off among growth-oriented Asian HNWIs Is the lingering perception that investing in long-term sustainable themes might require a sacrifice on returns.
Most studies remain inconclusive about the impact ESG integration has on investment performance.
In the case of the newly launched sustainable portfolios, UBS’s Knoepfel said they will be assessed no differently from conventional portfolios.
“Over a seven-year period, which is the average business cycle, we expect these ESG-focused cross-asset portfolios to have the same risk and return profile as conventional cross-asset portfolios," he said.
Given that most wealth clients in Asia are entrepreneurs, there are signs of a growing acceptance that ESG-focused companies are better positioned to capture growth opportunities and deliver better performance over time, Knoepfel added.
That’s a view echoed by James Cheo, a strategist at Bank of Singapore, who noted that demand for sustainable investing is likely to pick up in coming years as first-generation wealth passes into the hands of the next generation; several studies show that millennial and women are driving the sustainable investing trend, he told AsianInvestor.
”Companies are realising this as well and the business culture is changing slowly in the region,” he added.
MAKING AN IMPACT
There is also growing interest in impact investing, where investing occurs with the goal of generating measurable social and/or environmental impact alongside financial returns, sustainability specialists said.
As opposed to traditional ESG-focused investing, which occurs in the listed space, impact investing occurs primarily via private debt, private equity, and real assets.
Nevertheless, even when it comes to impact investing, investors are keeping an eye on returns, said Marisa Drew, the chief executive of impact advisory and finance department at Credit Suisse.
Structured credit notes related to impact investing can typically yield 4% to 6% in annual returns, similar to what would be offered with conventional instruments, noted Drew. “At the higher end of the spectrum, private equity investments could offer up to 20% or more,” she said.
In terms of sectors attracting socially responsible investments, Drew noted that apart from education and healthcare, investors in developing and developed markets were keen on affordable housing. “Many investors have made money in real estate, so it’s familiar terrain for them,” she told AsianInvestor.