Asia Pacific institutional investors are increasingly aware of climate change but few are seeking to invest to benefit from climate action, say experts. In addition, many have yet to prioritise climate risk in their investment decisions, according to newly released surveys. 

The latest report, issued this week by PGIM, Prudential Financial's investment business, found that 90% of the 100 global institutional investors it surveyed believe climate change is important, but 40% have yet to incorporate it into their investment process.

A paper issued last week by the International Forum of Sovereign Wealth Funds (IFSWF) showed that only slightly more than a third (36%) of sovereign wealth funds currently have a formal climate change strategy in place. More encouragingly, 30% of SWFs have over 10% of their portfolios invested in climate-related strategies, suggesting a willingness to shift capital.

The IFSWF report involved a survey of 34 sovereign wealth funds (SWFs), representing 43% of the world's sovereign investors.

Australian and New Zealand asset owners have also been shown to be ahead of the curve on ESG adoption compared to other regions, particularly the US.

A JP Morgan Asset Management survey of 2,300 institutional investors released last week indicated that one in four (28%) of Australian and New Zealand asset owners say ESG factors are in the top three most important considerations in their investment process, compared with 11% of US asset owners. And 39% of American investors do not consider ESG at all in their investment process.

The limited emphasis of climate change as a key investor influence was also notable in a new Global Institutional Investor survey by MSCI, released this week. It found that just 31% of large asset owner respondents, or those with over $200 billion under management, highlighted climate risk as having the greatest impact over how they will invest in the coming three to five years. 

There were more positive outcomes for Asia Pacific investor attitudes towards ESG following Covid-19. Nine out of 10 of large Asia Pacific asset owner respondents said they increased their ESG investments "significantly" or "moderately" in response to the spread of Covid-19 over the past year. The figure was 79% for Asia Pacific asset owner respondents as a whole. 

MISSED OPPORTUNITY

Taimur Hyat, PGIM

Despite a general rise in ESG engagement among asset owners, too few global institutions see the opportunities provided by climate action, Taimur Hyat, PGIM’s chief operating officer told AsianInvestor.

"The opportunities range from identifying tech-forward companies adept at transitioning to the new low-carbon economy, to incorporating physical and transition climate risk in analysing real assets; to supporting start-ups engaged with transformative technologies like carbon capture and storage," he said.

“Investors must look beyond the obvious physical risks to uncover hidden climate risks across their portfolios,” said Hyat. For instance, investors can overlay the geolocation of key production and supplier facilities with climate data and analytics, to reveal physical climate risks. This then enables them to assess the latent risk embedded in the value chains of individual firms, he said.

Early adopters that have taken an ESG approach for years have started to reap the rewards. As reported, The New Zealand Super Fund and Thailand’s Government Pension Fund (GPF) are among the most progressive asset owners when preparing to transition to a low carbon economy.

NZ Super chief executive Matt Whineray told AsianInvestor the fund's carbon exclusion policy added approximately NZ$800 million ($525 million) to the fund and about 60 basis points per annum to performance since being introduced in 2017.

One of the core elements of NZ Super’s climate change investment strategy has been to reduce the carbon intensity of its investments and its exposure to fossil fuel reserves. It met its original targets early, and so last year it increased its 2025 targets. NZ Super now aims to reduce the emissions intensity of the portfolio by 40% and fossil fuel reserves by 80%, up from 2020 targets of 20% and 40% respectively. 

DIFFERENT APPROACHES

Matt Whineray, NZ Super

Not all asset owners are taking the same approach. IFSWF’s data showed that SWFs appear to prefer investing in low carbon solutions (45%) than reducing exposure to high carbon sectors (39%). Thirty per cent reported having already increased exposure to low carbon investments.

In July, Saudi Arabia’s Public Investment Fund signed a $5 billion agreement with ACWA Power and the NEOM giga-project19 to build a green hydrogen-based ammonia production facility powered by renewable energy.

Private equity and real assets are often investors’ entry points for climate change integration because low-carbon opportunities are typically more obvious in these asset classes. These include renewable energy infrastructure or investments to upgrade real estate to higher energy-efficiency and sustainability standards.

For example, Korea Investment Corporation (KIC) owns a green building area of 236,000 square metres and has achieved savings of 629 MWh of energy via a green building energy saving system. The sovereign wealth fund also asks external managers to complete ESG questionnaires when indirectly investing in private equity, real estate, infrastructure and hedge funds.

According to the IFSWF report, investments in the next wave of climate solutions - agritech, forestry and renewables - have increased almost six-fold, from eight investments valued at $324 million in 2015 to 18 investments valued at $2 billion in 2020. For example, in May 2020, Singapore’s GIC led a $250 million capital round for Apeel Sciences – a company that produces plant-derived coatings to double or triple the shelf life of many fruits and vegetables without refrigeration.

GIC is aiming to become carbon-neutral in its global operations this year. In a paper published in September, Rachel Teo, GIC’s Futures Unit head, said the sovereign fund is focusing on green thematic opportunities such as renewable energy, green buildings, sustainable food and agriculture, electric mobility and other emerging technologies to help decarbonise the global economy.

“We expect these investments to grow over time, as companies transit to lower carbon intensive and more sustainable business models,” said Teo.