As the trend for sustainable investing gathers pace, institutional investors and wealthy families have started to recognise thematic investment opportunities such as renewables.

Asset owners have increasingly integrated sustainability into their investment portfolios, whether by setting their own sustainable investment policy; limiting or stopping investments in certain activities like coal mining; or setting out expectations for their external managers.

Until recently, very few Asian institutions allocated to specific sustainable thematic investment opportunities, because “such allocations are perceived as too niche and may not fit so well with asset owners’ existing asset allocation buckets,” said Paul Milon, head of stewardship for Asia Pacific at BNP Paribas Asset Management.

This is set to change as both institutions and wealthy families are putting more emphasis on thematic investments such as alternative energy and broader energy transition themes, he told AsianInvestor.

“Sustainable themes such as alternative energy are poised to benefit from the massive investments needed for the transition to a Paris-aligned economic model,” he said.

Family office investors in particular have been partial to thematic investing, Milon said. They are less interested in the Environmental, Social, and Governance (ESG) integration aspects, because they prefer seeing their money invested for good, rather than to satisfy a corporate policy or to meet an industry standard, he added.

“Asian private bank clients are all over the energy transition strategies, thematic water and sustainable food opportunities, where you can see much more of the story behind the investment and the impact that you have,” Milon said.

“It often relates to the type of business they have built and the legacy they want to create, whether that be energy transition, access to food and water, or poverty alleviation. It’s about finding the right investment that resonates with their beliefs.”

LOW CARBON INVESTING

Superannuation funds in Australia and New Zealand have also been sharpening their focus on low carbon investment strategies.

Del Hart, NZ Super

Del Hart, head of external investments and partnerships at New Zealand Superannuation Fund (NZ Super), told AsianInvestor that renewable energy was a part of the fund’s original 2016 climate policy programme, although initial activity did not meet its expectations.

“Our experience to date is limited to investing in our US platform, which has performed well and we’ve learnt a lot from that. It’s a diversified portfolio of large-scale wind and solar power assets,” Hart said.

The fund is now looking to replicate that in other parts of the world. “We launched a similar development platform in Europe at the end of 2019. That one has been harder to gain momentum during a Covid-impacted year,” Hart explained.

“More recently, we’ve looked at Asia. So [that’s] three very different geographical areas in the context of a significant amount of capital looking for these types of investments, particularly on the operating side. There are different ESG risks, different jurisdictional complexity that we need to understand.”

The types of assets the fund is seeking is broadly focused on renewable generation, or anything related to decarbonisation and climate transforming industries. “On the technology side, we are currently looking at a US-based manager of a climate tech fund, hydrogen alternatives, and also waste energy,” Hart added.

Because NZ Super is a long-term fund investing for absolute return, Hart said it has the ability to go up the risk spectrum and invest at that development stage, “which gives us an advantage over some of our peer funds”.

A strategy report is being delivered to the NZ Super board this week and Hart said the near-term plan is focused on deploying capital in the European and American markets, “where there’s a tailwind from government policy and we are confident that we can get scale.”

“We are also looking at developed Asia for the compelling risk-adjusted returns, but we have limited experience, so it’s a question of finding the right partners,” she said, adding that within the region, NZ Super sees the greatest promise for renewables in Southeast Asia; Vietnam and the Philippines in particular.

Meanwhile, Melbourne-based VicSuper has invested $700 million in a customised international equity carbon strategy that aims to deliver a 70% reduction in greenhouse gas emissions intensity against its benchmark.

WARMING UP

Despite being relatively new to the scene, investing institutions in Asia have not been idle, and activity in renewables is definitely accelerating. The Monetary Authority of Singapore (MAS) recently set out its climate strategy and has earmarked $1.8 billion of its official foreign reserves to integrate climate risks and opportunities into its investment framework.

“We aim to seize investment opportunities from the transition to a lower-carbon future and support the transition of portfolio companies,” said MAS managing director Ravi Menon.

Experts have also said that global pledges to achieve net-zero emissions by 2050 have opened up renewable energy and infrastructure opportunities for investors.

Greater investment in renewable energy and energy efficiency should be a top priority to decarbonise the global economy, according to Lucille Dufour, a senior policy advisor at the International Institute for Sustainable Development.

“But it will not pay off as long as G7 countries continue propping up the fossil fuel industry,” she said at the G7 summit last week. She urged countries to shift their support away from fossil fuels, “towards a just and fossil-free recovery.”

The investment potential in renewable energy is enormous, according to a 2019 report by Mercer. It showed that while developed and emerging market equities will be negatively impacted by the move to a low carbon economy, sustainability themed investments will benefit from this transition.

For investors, it is believed that adding sustainability-linked assets to a portfolio can help enhance its resistance to the dramatic changes likely to take place between now and 2050.