The rise of sustainable investing in Asia

Asia's foray into sustainable investment is just beginning. But can the region transform from laggard to leader at some point?

26 Sep 2019

Few would have forecast a few years ago that China would emerge as the world’s second largest green bond issuer in 2018, just two percentage points behind the US; or that Abenomics would transform Japan into the world’s fastest-growing sustainable investing (SI) market with a similar assets under management (AUM) penetration to what the US had in 2014; or that in 2019 Asia would have more stock exchanges with mandatory environmental, social and governance (ESG) reporting than any region in the world.

Attitudes toward sustainable investment in Asia have changed radically in just a few years. And while it has become evident that governments must lead in Asia to produce meaningful change to sustainability challenges, there has also been indirect pressure from the wider public on governments and corporations, particularly on issues relating to climate change and air pollution, which affect people every day in Asia’s cities.

A key driver of Asian governments’ recent policy shift toward SI has been the realization that sustainability linked investment can help tackle broader policy concerns; from shrinking labor forces and slowing economic growth, to migration and infrastructure, climate change and low-carbon world transition risks. To this end, sustainable finance and investment are being harnessed to support key government policies, be it to strengthen corporate governance to stimulate corporate profitability or to fund the infrastructure expense burden with green finance initiatives.

Asian asset owners have embraced SI because of the rising acceptance that SI does not compromise financial returns or performance.

Asian state asset owners ranging from Japan’s government pension investment fund to the Hong Kong Monetary Authority (HKMA), Singapore’s GIC and the Thai Government Pension fund, among others, have led the SI drive by leading through example: integrating sustainability into their own investment process and obliging their investment managers to follow suit. Many have also backed regulators to enhance corporate stewardship and governance code frameworks and enforced ESG disclosure reporting. The HKMA, which regulates the Hong Kong financial system, manages an HKD 4 trillion Exchange Fund and recently became a signatory of the UN Principles for Responsible Investment, is a case in point; it has been uniquely positioned to put into practice what it has promulgated via new green finance and ESG regulation. Others, like Singapore’s Temasek, have adopted ESG into investment decisions strongly motivated by climate change risk.

Asian asset owners have embraced SI because of the rising acceptance that SI does not compromise financial returns or performance. For longterm investors, including pension funds and insurance companies, SI can lower downside risk from “stranded assets” created by climate change and transition risk. For credit investors, good corporate governance, the central pillar of ESG, can help lower credit risk. In emerging markets, ESG equity strategies have shown outperformance relative to broader benchmarks, which may be due to smaller perceived tail risks of companies with good corporate governance.

Asia’s commitment to ESG

Source: UBS, as of September 2019

Sustainable investment is developing rapidly in Asia and with it the breadth and scope of local SI products is improving. The boom in green bonds in particular reflects pent-up demand for investment opportunities in environmental themes, which have strong regional resonance, in our view.

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Author:

Carl Berrisford, Analyst, UBS AG

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