Institutional investors in Asia consider climate change and artificial intelligence (AI) to mostly offer risks to their investment portfolios, as opposed to peers in Europe and the US which balance such concerns with a belief that they offer opportunities.

That was one of the main findings of a new research report conducted by Create-Research and BNY Mellon Investment Management, which is being released today (September 16).

The study, entitled ‘Future 2024’, studied investment ‘mega-trends’ and how investors can best prepare for them. It combined a survey of 400 studies with interviews with 45 chief investment officers from 16 countries.

The survey focused on ascertaining how much climate change and AI will impact on investors’ portfolios and how they should respond. Notably, Asian respondents were the most defensive, seeing both areas as offering risks but few seeing them as potentially supplying returns.

Armin Rajan, chief executive and project leader of Create-Research, believes that financial regulators and capital markets in Asia are to blame for not promoting enough transparency around the potential impact of climate change to help investors assess it.

“ESG (environmental, social and governance principles) and climate change in particular are not seen as risk factors that the markets are pricing in yet,” he told AsianInvestor. “In Scandinavia, Paris and to a lesser extent the UK the markets are pricing it in, and if they do then investors feel there’s a reward in it.”

According to the survey results, Asian respondents widely think that it’s up to governments or regulators to mandate rules or policies over ESG, rather than them taking a more proactive stance.

“The exception in Asia is Japan, because it has far better governance than in other markets,” said Rajan. “There’s an expectation there that if you fix the governance part of ESG it sets the standards for environmental and social [assessment] and as a result respondents in Japan were more optimistic than in other Asian nations.”

CARBON MARKET REQUIRED

He believes the biggest single step governments across the world can take to convince investors to more seriously measure climate risk would be an effective carbon emissions market.

“If the Paris Climate Agreement targets [agreed to by almost all nations in 2015, which target just a 1.5 degree Celsius rise in the global average temperature] are to be met there has to be effective carbon pricing or taxes,” he argued, noting that countries like China are currently way behind the progress needed to meet their 2030 emission reduction targets.

“If the world continues with the progress it’s made since 2015 it will take until 2098 before they are able to [cut carbon emissions to agreed levels],” he said.

Added to that, nations need to invest a lot more in renewable energy," Rajan said. “Renewable energy will only account for 30% of global energy consumption by 2030. It requires a hugely significant investment into alternatives sources of energy.”

These factors, if not addressed, are likely to have a multi-faceted impact on investment portfolio risks as climate change worsens. According to the report, nearly 80% of energy companies and almost 100% of financial companies think climate change will affect their businesses.

On the other hand, combating climate change offers the potential for investment opportunities in new or existing renewable energy technologies and solutions, plus an effective carbon tax market.

Deborah Bannon, head of institutional sales and consultant relations for the region at BNY Mellon IM, pointed out that “those that see climate change as an opportunity over a risk [in Asia Pacific] are Australia and New Zealand [respondents].

Deborah Bannon, BNY Mellon IM

“They have made a lot of progress in embedding ESG beliefs into their policies and statements and how they formulate implementation plans and consider or add climate portfolios,” she added.

New Zealand Super, the superannuation fund of the country, is a particular example. It aims to reduce the carbon emission intensity of its portfolio by 20% and that of from fossil fuels in its portfolio by 40% by 2020, as part of a dedicated effort to reduce its exposure to such risks and promote more ESG-friendly behaviour among companies it invests into.

Bannon noted that having strong asset owner examples plus regulator assertiveness, could help persuade more investors to analyse the impact of carbon change on their portfolios seriously.

“If you look at what GPIF (Government Pension Investment Fund of Japan) has done to introduce ESG into its portfolios and the influence of regulators too, it has encouraged some influential trust banks and smaller players to take the first steps to consider climate change too,” she said.

ALARMED BY AI

Asian respondents to the survey were also more concerned than their European and US peers about the impact of AI in different industries.

Create’s Rajan argued that this concern made sense, given the level of industrialisation in the region and the disruption many industries could face from major AI and robotics automation.

The study pointed to 2016 research by the Oxford Martin School and Citi, which estimated that 77% of jobs in China could be disrupted by automation, along with 69% in India and 49% in Japan. That compares to just 47% in the US and 35% in the UK.

One danger is that the advent of 3-D printing leads more developed western nations to source more manufacturing locally, undercutting Asia’s competitive advantage.

“Will emerging markets remain growth stories for a long period of time, or will they begin to lose some of their dynamism?” Rajan asked. “It’s another problem for investors to consider.  

AI could also accelerate the disruption of companies, and cause their average lifespan to drop. Data from Innosight notes the average company lifespan on the S&P 500 index has dropped from nearly 30 years in the mid 1990s to around 22 years today, while it is projected to drop to less than 15 years by the mid-2020s.

“What does that mean to a buy and hold investor?” he asked.

For Asia’s manufacturing-focused economies, the spread of AI could pose some serious challenges.