Asia's environmental, social, and governance investing

COVID-19's impact on ESG investing and how Asia's ESG leaders are outperforming

24 Jun 2020

At a glance

Sustainable investing strategies globally have been shown to deliver returns that are competitive versus non-sustainable ones. Throughout the disruption that the COVID-19 crisis has brought to the global economy and markets in 2020, sustainable investing (SI) strategies and instruments have delivered comparable or better performance than conventional equivalents. This has especially been the case in Asia, where we have seen MSCI Asia ex-Japan ESG Leaders index outperform the regional MSCI Asia ex-Japan benchmark by over 200 basis points year-to-date. The pandemic underscores the relevance of ESG considerations to company performance and investment returns, and we expect this to continue to influence corporate and investor actions going forward.

The superior performance of Asia ex-Japan ESG leader strategies during the COVID-19 outbreak has been partly driven by low exposure to gaming, alcohol, and fossil fuel stocks, which tend to be excluded from ESG leader indices. Moreover, a high exposure to new economy stocks, where many ESG leaders are concentrated, has supported ESG leaders' performance as these stocks have often benefited from stay-at-home consumption trends.

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COVID-19 triggering greater awareness of benefits of ESG investing

Disruption to the global economy and financial markets triggered by the COVID-19 pandemic has raised the profile of environmental, social, and governance (ESG) investing for both institutional and privately managed assets. The crisis has heightened the importance of mitigating risks that arise from natural calamities in investment strategies: the same risks that might be present in longer-term trends like the build-up in global CO2 emissions and resulting natural disasters caused by climate change.

The visible impact on the environment witnessed in many countries due to a halt in economic activity as a result of COVID-19 lockdowns has also served to highlight that humans can have a meaningful impact on the environment through actions that limit CO2 emissions. Government measures adopted to address COVID-19 shed light on key social and governance issues of corporations from work-fromhome, treatment of employees, and shareholder capitalism. It is not entirely a coincidence that inflows into sustainability-linked assets exceeded those of non-sustainable assets during 1Q20, and that ESG leader indices outperformed equivalent all market indices over this period.

Quarterly sustainable fund flows (USD bn)

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Asia's ESG leaders are outperforming

In Asia, there is a strong perception that highly ranked ESG companies, or "ESG leaders," enjoy superior corporate governance. Indeed, a key reason why ESG leader strategies achieve excess returns in emerging markets and emerging Asia is the high dispersion between high and low ESG performers compared to developed markets. Because of the prevalence of poor corporate governance in emerging Asia, companies with a consistent record of strong corporate governance are rewarded by the market due to lower tail risks. In addition to superior corporate governance of ESG leaders, the industry exposure within ESG leader indices in Asia partly supports competitive performance versus the regional benchmark during COVID-19. For example, the top ten holdings of MSCI Asia ex-Japan ESG Leaders index are concentrated in service stocks with small exposure to manufacturing and energy, the two sectors which have experienced a sharp deterioration in fundamentals from COVID-19.

Asia ESG leader indices avoid investments in industries like alcohol and gaming, the two sectors in Asia which have suffered under COVID-19 due to the impact of lockdowns on the entertainment sector and cross-border travel. So far during the global coronavirus outbreak, MSCI Asia ex-Japan ESG Leaders have outperformed the regional benchmark by over 200 basis points.

While this is a short time-frame and an unprecedented event, investors will be comforted by evidence of longer-term excess returns of Asia ESG leaders. And while past performance is no guarantee of future performance, we expect ESG considerations to continue to influence corporate and investor actions in Asia in the future.

MSCI ESG Leaders indices outperformed year to 22 April

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