Environmental, Social, And Governance Concerns: Shifting Mindsets In Asia.
Legal News & Analysis - Asia Pacific - Regulatory & Compliance - Energy & Project Finance
23 October, 2018
The continued growth of China as a global economic powerhouse and the ongoing success of the Tiger Economies - South Korea, Singapore, Hong Kong, and Taiwan - has fueled investor appetite across the region. As the Asian investment community matures, the region's approach to environmental, social and governance (ESG) investment factors is shifting.
The 2018 Preqin Global Private Equity and Venture Capital Report cites a Schroders study highlighting that, when asked if ESG factors are an important component of investment strategy, 37 percent of respondents in the Asia-Pacific region felt they were already important; 46 percent responded that they will become important and only 16 percent saw them not becoming important at some point in the future. This compares positively with 21, 24, and 53 percent respectively across the same three categories in the U.S., but leaves some room for growth in Europe, where responses to the same questions were split 58, 28, and 14 percent.
Oliver Wyman's 2018 publication Driving ESG Investing in Asia: The Imperative for Growth, cites evidence from Larry Fink's 2018 annual letter to CEOs, a 2017 Financial Times article into the growing number of pension funds divesting from fossil fuels, and a 2017 Washington Post report of Harvard students protesting to demand the divestment of investments by the university in the coal industry, to conclude that "some of the world's most influential institutional investors […] appear to be especially proactive in insisting their investment managers adopt a long-term mindset to sustainable growth."
However, while there are indicators that attitudes may be shifting both globally and within Asia itself, the same Oliver Wyman report also cites data from the Global Sustainable Investment Alliance, which shows that in 2016 the percentage of total managed assets in the Asia (ex-Japan) region under ESG management was 0.8 percent, compared to 52.6 percent in Europe and 21.6 percent in the U.S.
To further complicate the picture, the same data shows that Japan has bucked the wider pan-Asian failure to embrace ESG investment in recent years, with a growth in ESG investment assets under management from US$7 billion in 2014 to US$474 billion in 2016 (a growth of 6,771 percent), albeit that such figures show ESG investment in Japan to still be in a nascent stage compared to the U.S. and Europe. Much of the growth in Japan's ESG assets under management can be attributed to the introduction of a Japanese stewardship code and the world's largest pension fund (the Japanese Pension Investment Fund, the GPIF) becoming a signatory to the UN's Principles for Responsible Investment on 16 September 2015.
Looking to the future
China's 13th Five-Year Plan, governing the country's government policy from 2016 to 2020, includes plans to transition to a more environmentally friendly economy, a position echoed by Vice Premier Liu He when he described reducing pollution as one of China's "main strategic goals" at the World Economic Forum's Annual Meeting in Davos in 2018. These expressions as to the direction of Chinese government sentiment were put into formal policy with the publication of the Environmental Risk Management Initiative for China's Overseas Investment, on 5 September 2017, by a number of China's leading financial institutions.
Beyond China, positive signs for the future of ESG more broadly have been seen in Hong Kong and Singapore with the implementation of green bond schemes in each financial centre in 2018 and 2017, respectively. In a January 2018 paper entitled Impact Investments by Foundations in Singapore and Hong Kong for the Asia Centre for Social Entrepreneurship and Philanthropy (an academic research centre at the National University of Singapore Business School), the authors noted the impact of millennials — including many educated in the U.S., Europe, and Australasia — on ESG or 'impact investing' in Hong Kong and Singapore, stating: "Westernised ideas of societal contribution coupled with existing resources at their disposal have led this younger generation taking over family offices and foundations to place a greater proportion of their assets into impact investments."
Asia is at a cross-roads in terms of its ESG investment strategy. As several of the reports and governmental statements referenced above illustrate, attitudes are shifting in Asia; however, such changes will take time to be reflected in a perceptible shift in investment activity and the forms of ESG shareholder activism seen in the U.S. and Europe.
Japan's recent moves to embrace ESG investing and the policy developments seen in China, Hong Kong, and Singapore, particularly in relation to environmentally-conscious investing, provide support for the view that change is on the horizon. However, the diversity of Asia's cultures and economies cannot be underplayed and there remains a tension between economic returns on investment and ethical or ideological considerations.