Growing institutional appetite for environment, social and governance (ESG)-based investment strategies in Asia is leading to greater product innovation and more investment opportunities in this space for high net worth (HNW) investors, experts have said. But demand for such products is not rising as fast as hoped.
ESG investment is defined as investing in companies and funds that focus on improving their environmental or social or governance impact while also earning a financial return.
The pace of adoption of ESG-based or sustainable investing remains slow among HNWIs, as concerns about the performance of such strategies linger, they said.
“Demand for ESG strategies from institutional investors is helping to drive product innovation and development among asset managers," James Gifford, senior impact investing strategist at UBS Wealth Management, told AsianInvestor.
When asset managers create new ESG-related funds for institutional investors, it becomes easier for private banks to onboard these funds and offer them to their clients, he said.
A BNP Paribas survey released in May showed that institutional investors in the Asia Pacific have become the most willing globally to include ESG strategies in their portfolios.
For their part, fund houses, in particular those from Europe, have become very active in promoting ESG strategies in the region, accounting for at least half of all the funds that incorporate ESG investing principles, according to Wing Chan, director of manager research for Asia at Morningstar.
Gifford noted that while family offices and wealthy investors continue to drive much of the smaller-scale investment taking place in the region, institutional investors are also driving the development of ESG products that can eventually be on-boarded by private banks.
Some private banks, such as JP Morgan Private Bank, have already indicated they are looking to add more funds in this space as they are seeing increasing client enquiries on ESG themes such as water and have said that interest in the general implementation of an ESG investment framework is growing in the region.
ESG queries increasing
Tuan Huynh, chief investment officer for Asia Pacific at Deutsche Bank Wealth Management, also sees signs of interest in ESG investing picking up: he cites the example of a Chinese entrepreneur he recently met wanting to start a foundation that would make investments taking ESG criteria into consideration as an indication that such strategies are becoming more relevant for HNWIs.
However, he also acknowledged that in Asia the desire to evaluate investments through an ESG lens is under-developed compared with Europe and the US.
This may change as first generation wealth passes into the hands of the next generation; and several studies show that millennials globally are driving the sustainable investing trend.
“Once you move to the second or third generation in Asia, demand for socially responsible investing is like to grow and lead to a greater diversification of assets,” he added.
This view is shared by Melissa MacDonald, global head of responsible investing at HSBC Global Asset Management: “Women and millennials are much more concerned about environmental and social issues. But it is a long-term shift and will take time. What we are seeing at this point is greater interest but not necessarily a conversion of assets into ESG assets.”
According to the Global Sustainable Investment Review 2016 by the Global Sustainable Investment Alliance, $52.1 billion in assets were managed by one or more sustainable investment strategies in the Asia-Pacific ex-Japan.
When Sharia-compliant funds are excluded, the total sustainable investment assets total $34.2 billion, it said.
Sustainable assets have grown 16% since 2014, according to the report, compared with 32% between 2012 and 2014.
In the report, sustainable investment encompasses negative/exclusionary screening; positive or best-in-class screening; norms-based screening; integration of ESG factors; sustainability themed investing; impact or community investing and corporate engagement and shareholder action.
Pick the right ESG manager
HNWIs typically start the ESG investing journey by either investing in ESG funds or requesting ESG screening in investments made by their asset managers, said Virginia Devereux Wong, head of Asia wholesale business at Aberdeen Standard Investments.
However, a continuing perception that ESG strategies tend to underperform conventional investment strategies remains a key concern for wealth investors, experts said.
But as Pictet Wealth Management’s head of product management, Tullio Musso, noted, ESG-inclusive strategies are not strictly comparable with non-ESG inclusive strategies.
“If investors decide they don’t want to invest in certain sectors, the universe of investable sectors shrinks and that changes the benchmark you can use.
“For instance, if an investor decides not to invest in tobacco companies, he or she cannot use the MSCI World, which has tobacco companies, as a benchmark anymore,” Musso told AsianInvestor.
Morningstar’s Chan noted that as with all investment strategies, it is important to choose good ESG managers. “Not all ESG focused funds are the same. It is important to do your research and differentiate between good and bad managers.”
David Li, senior portfolio manager at Impax Asset Management, pointed to another problem: “Many Asian investors don’t have a long term horizon. Sustainable investing is a long-term play but most investors tend to focus on more immediate matters such as quarterly numbers or the next big trend. A mindset change is needed to embrace ESG investing.”
For those willing to look at ESG there are plenty of opportunities especially in the areas of climate change and resource scarcity, according to Masja Zandbergen head of ESG integration at Robeco.
“Many governments, for instance, China, are trying to build a lower carbon footprint future and investors can play into that by investing in the right companies,” she told AsianInvestor.