Every Chinese New Year, AsianInvestor makes 10 predictions about developments that will affect global financial markets and the portfolios of Asian investors, especially asset owners. Today we look at how ESG will affect asset owners' investment strategies.

Will the rising importance of ESG cause asset owners to greatly shift their investing approaches? 

Answer: Yes

Environmental, social and governance (ESG) has become a buzz word in the investment community in recent years, and the pandemic has only propelled it further into the spotlight.

The MSCI 2021 Global Institutional Investor Survey revealed that 79% of asset owners in Asia Pacific increased ESG investments “significantly” or “moderately” because of the coronavirus pandemic. In addition, 59% of the 200 institutions surveyed said they expect to “completely” or “to a large extent” incorporate ESG issues into their investment analysis and decision-processes by the end of 2021.

This was because they believed that companies with high ESG ratings showed stronger resilience during the pandemic, for instance through better relationships with stakeholders such as supply chain vendors, which helped with continuity planning. In addition, 36% said that they were looking to increase the 's' (social) in their ESG mix. 

Asset owners in Asia are also proving to be more active in ESG as compared with their North American counterparts. Another survey by British investment consultancy Bfinance found that 70% of asset owners in Asia have an ESG, responsible or sustainable investment policy, nearly on a par with the 76% in Europe and notably more than the 56% in North America.

However, it remains to be seen how much of an impact these ESG strategies have. Only 12% of asset owners surveyed by the International Forum of Sovereign Wealth Funds (IFSWF) said that they have a specific climate change framework in place, and 48% said they do not have a systemic way of including climate change in their investment process.

Of course, the state of ESG among asset owners varies across Asia Pacific. In Australia and New Zealand, for example, ESG is already embedded into the backbone of large asset owners to the point where superannuation funds expect fund managers they work with to integrate ESG into their investment approaches, which means fund managers are largely on board with the idea.

But in other parts of Asia, some fund managers – particularly the small and medium-sized players – are still adopting a wait-and-see approach, mostly because they don’t want to invest resources into something they aren’t yet sure will produce results.

A lack of strong regulatory push in Apac causes some inertia too, as regulations and standards vary across the region. Markets such as China, Malaysia and Hong Kong recently updated their ESG regulations and now have guidelines that make ESG reporting a requirement for listed companies. However, these reporting requirements and standards differ between markets.

In addition, some of these requirements have been criticised for being too vague and not in line with global standards. For instance, S&P Global urged Indonesia’s financial services authority to provide more guidance and incentives to improve the quality of ESG data and its impact.  

“Regulations are not yet there in the US or Asia Pacific, but the leading investors in both of these regions are already behind the push to make this a mandatory screening (for example, Blackrock in the US and sovereign wealth funds in Apac),” said Olivier d’Assier, head of applied research for Asia Pacific at financial intelligence firm Qontigo.

Indeed, asset owners have the power and clout to engage with regulators and corporations to work out principles, targets and disclosure guidelines, which can be one of the more effective strategies to help companies develop sustainable practices. 

Asset owners will also want to make sure that their ESG efforts are not simply token gestures, or engaging in greenwashing. This can be done through setting specific targets that are in line with the organisation’s goals, and reporting progress towards those targets regularly to keep the firm accountable.

All in all, it appears that asset owners believe in the importance of ESG and are mostly genuine about their intent. They appear to have already integrated principles into their investment strategies and are likely to continue to do so this year. The next step is ensuring their efforts are making genuine impact.

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