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Getting Asia Ready for ESG Investing

Senior Research Analyst at Marsh & McLennan Companies' Asia-Pacific Risk Center Head and Founding Member of Insights and Capacity Building at AVPN’s Knowledge Centre

This is the third article in a weeklong series focused on climate-related topics. The previous articles can be read here and here.

Environmental, Social and Governance (ESG) investing is gaining traction globally because of the resilience it can offer in times of uncertainty and the value it creates to foster sustainability. The Global Risks Report 2018 indicates that most business leaders and risk experts are widely pessimistic about the year ahead. The overall risk landscape in 2018 highlights the rising importance of environmental and climate-related threats, among other intensifying risks emanating from political tensions, global power shifts, cyber vulnerabilities, and income inequality.

Not surprisingly, investors are searching for new ways to position their investment portfolios to best navigate the uncertainty. According to a global survey conducted on institutional investors regarding responsible investing, 57 percent of respondents believe that the incorporation of ESG criteria has a positive impact on risk-adjusted returns and in building more resilient, sustainable portfolios.

Indeed, some of the world’s most influential institutional investors, such as investment management corporations, pension funds, and tertiary education endowments, among others, are especially proactive in insisting that their investment managers adopt a long-term mindset to sustainable growth. This is due to the growing evidence that companies and businesses with better ESG practices are associated with premium valuations and long-term financial value creation.

For instance, the 2018 annual letter that Larry Fink, BlackRock president and CEO, sent to all CEOs of the S&P 500 earlier in the year fully epitomized the mounting sense of urgency and highlighted the shift toward stewardship within the investment community. In the letter, he emphasized that “society is demanding that companies, both public and private, serve a social purpose,” and that over the longer-term horizon, ESG issues—ranging from climate change to diversity to board effectiveness—can have quantifiable financial impacts and affect the potential for growth.

In fact, investors belonging to specific demographic groups are increasingly asking for investments that are good for the society and environment—and their portfolios. For instance, millennials are twice as likely to invest in companies or funds that target social or environmental outcomes. In addition, four in five (80 percent) women are observed to be keen investors in ESG as opposed to 60 percent of men, and the trend continues with women’s rising financial independence.

Drivers and Challenges Shaping ESG Adoption in Asia

Despite these global demand drivers, adoption of ESG investing in Asia has been comparatively slow. According to the Global Sustainable Investment Alliance, assets devoted to ESG investing are no more than 1 percent of total managed assets in Asia ex-Japan compared to the U.S. (21.6 percent), Australia/New Zealand (50.6 percent), and Europe (52.6 percent).

Many challenges remain in adopting ESG investing widely in Asia. The combination of limited knowledge and a skill resource gap has made ESG daunting for some Asian investors. Apart from a lack of awareness and requisite expertise of the team to interpret the multitude of ESG standards, there are many misconceptions about ESG hampering financial performance.

These issues are further exacerbated by the lack of consequences for inaction and the lack of collective efforts by Asian regulators and governments in enforcing ESG policies as opposed to their peers in Europe.

Assessing the ESG Maturity Level of Asian Investors

A recent report studied these trends and illustrated the existing ESG Investing landscape in Asia, drawing key insights and perspectives from investors in the region. It was clear from the interviews conducted across selected family offices, banks and PE firms, that investors in Asia today exist across a broad spectrum of practices and perspectives. Their experiences at different maturity stages along their ESG investing journeys illustrate the unique challenges they face while playing different pivotal roles.

For instance, the study categorizes investors into three differentiated stages in the figure below:

Exhibit 1: Roadmap of the ESG Investing Journey

Source: AVPN-Oliver Wyman analysis

Knowing where an investor is on this spectrum can help define next steps and lead to a more sustained ESG investing practice.

On one hand, early-stage ESG investors are usually characterized by limited ESG-related knowledge and awareness, viewing ESG impacts and financial performance strictly as trade-offs. On the other end of the spectrum, advanced-stage ESG investors usually integrate ESG factors into their risk management and due diligence processes, with no compromise on financial performance, leading to more sustainable, long-term value creation for their investment portfolios.

Next Steps

The report highlights the various lessons learned from the interviewed investors, including common challenges and the potential sweet spots of ESG investing for other social investors in Asia looking to increase their ESG investing efforts. It also offers the following set of action items recommended to these investors at different ESG maturity stages along the ESG investing journey (see infographic).  

To begin their ESG investing journey, it helps to identify the respective stages of maturity the investors are more aligned with to apply the necessary action plan and call to action. With massive wealth creation being predicted for the region, investors are poised to make significant contributions to ESG investing adoption across Asia.

Exhibit 2: A Call to Action: Six Recommendations To Initiate the ESG Investing Journey

Source: AVPN-Oliver Wyman analysis

In summary, integrating ESG factors into investment decisions is no longer an option, but a rising imperative. Although Asia’s assets under management remain low today, the region represents significant growth opportunities for ESG investments in the coming years.

If done right, the integration of ESG factors into investment decision processes can drive long-term value creation and encourage sustainable business practices across the region. With close collaboration by key stakeholders such as regulators and policymakers, ESG investing can empower consumers, resolve financing gaps that currently exist across the green financial ecosystem, and further align Asia’s future growth to a path of sustainability and stability.

Jaclyn Yeo

Senior Research Analyst at Marsh & McLennan Companies' Asia-Pacific Risk Center

Jaclyn Yeo is a senior research analyst at Marsh & McLennan Companies’ Asia Pacific Risk Center. In this role, she leads sustainability and climate-related research programs to develop risk management insights that can be applied by policymakers and industry practitioners. Prior to joining the APRC, she was a risk researcher at the Cambridge Centre for Risk Studies, based in Cambridge, the UK.

Martina Mettgenberg Lemiere

Head and Founding Member of Insights and Capacity Building at AVPN’s Knowledge Centre

Martina Mettgenberg Lemiere, PhD, is head and founding member of Insights and Capacity Building at AVPN’s Knowledge Centre. In this role, she and her team developed insights for the social investing sector under the Capability Development Model, the Social Investment Landscape and the Continuum of Capital in Asia.

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