As interest and commitment grows, managers should at least have ESG policies in place
September 2019, Singapore—Interest and developments in sustainable investments are brewing in Asia, driven by institutional investors, private banks, and family offices, and supported by socially conscious millennials, according to Cerulli Associates’ newly released report, ESG and ETFs in Asia 2019: Assessing the Impact and Potential.
The extent of environmental, social, and governance (ESG) adoption varies according to the stage of development and awareness in each market. For example, markets like Australia and Japan are ahead in embracing ESG investment principles. ESG factor integration is the most popular strategy used in Australia. Japanese institutional investors tend to use the governance factor the most and prefer positive screening.
In the rest of Asia, the ESG drive is spearheaded by the largest asset owners such as pension funds and sovereign wealth funds. Cerulli’s survey of institutional investors in the region found that negative screening is their most preferred approach. However, asset owners are also keen on integrating ESG factors into their investment portfolios, with more than 80% communicating this preference to managers.
“Across Asia, ESG is gathering momentum in the form of various initiatives. As key challenges in terms of data disclosures are addressed, the pace of ESG adoption will only increase. Slowly but surely, ESG data disclosures from companies should gradually improve over the next few years as investors (whether managers or asset owners) come to understand the implications of ESG risks to their portfolios. Over the medium term, ESG is expected to become an integral part of fundamental analysis,” said Leena Dagade, an associate director at Cerulli.
Managers are responding to the changing paradigm and ramping up their ESG capabilities. “Managers need to showcase their ESG capabilities and strengths in ESG research as asset owners at the very minimum will require their external managers to have ESG policies in place, or explain their approaches to ESG investing. Managers that demonstrate their expertise in ESG stand to gain. With ESG expected to become an integral part of fundamental analysis, managers must strive to embrace these principles sooner rather than later,” Dagade added.
In terms of asset classes, asset owners are keen to employ ESG principles in equities and alternatives. However, assets under management (AUM) held in sustainable investments by Asia ex-Japan locally domiciled funds comprise just a tiny fraction of total mutual fund assets in Asia, according to Cerulli’s estimates. “Nevertheless, catalysts such as developments in global markets, pressure from top institutional investors, and the preferences of emerging millennial investors are likely to grow the proportion over the medium to long term,” said Kean Yung Siau, an associate analyst at Cerulli.
Even as curiosity over ESG is increasing across Asia, the industry is faced with challenges on various fronts. These include defining and interpreting ESG, and the perception that ESG means sacrificing performance. Asset owners see ESG playing a role in addressing or reducing the risks of investing, but they rate ESG’s role in improving performance the lowest. As for retail investors, one of the major hurdles is their short-term investment horizons.
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