Asia set to become sustainable investment hub
The region presents investors with a growing range of opportunities to generate positive returns and have a positive impact on the planet at the same time.
The region presents investors with a growing range of opportunities to generate positive returns and have a positive impact on the planet at the same time.
Asia looks set to become a hotbed for sustainable investment, driven by structural economic factors, growing institutional allocations and tightening regulations.
Investors in Asia have lagged developed market peers in terms of integrating environmental, social and governance (ESG) analysis into their decision-making and allocations.
While the implementation of ESG analysis in fixed income investing also remains well behind equities in the region, we expect the former to accelerate quickly in coming years.
There are already several indicators pointing to a dramatic uptick in sustainable investment in Asia. Assets under management of Asian signatories to the UN Principles for Responsible Investing have surged 87 per cent in the three years to end-2018, according to our calculations based on PRI data.
Moreover, large asset owners in Asia are allocating increasingly to strategies that take ESG issues into account. Multi-lateral institutions such as the Asian Infrastructure Investment Bank (AIIB) and Asian Development Bank (ADB) have launched ESG and green bond mandates in recent years.
An additional layer of support is coming from government-linked entities across Asia. Key government-linked institutions from nations including Japan, Taiwan Malaysia and South Korea have been active in promoting the adoption of ESG analysis and launching ESG investment mandates.
These leading organisations are blazing a trail that we anticipate will influence the behaviour of other large institutions in the region.
In addition, socio-economic factors are driving change. The size of the region’s populations and the pressing need for development mean the stakes are higher in Asia than developed markets in many respects.
Developing Asia is estimated to require at least $26 trillion in infrastructure investment over the next 15 years.1
But the advance of climate change and consequent need for sustainability looks set to transform how Asian governments build and finance energy infrastructure, sustainable transport and waste management in future.
Asia’s fixed income markets will be critical to funding these infrastructure needs. Asia already accounts for more green bond issuance than the US.2 Global issuance of green bonds is projected to reach $250 billion this year, up from $168.5 billion in 20183.
China leads the pack from an emerging markets perspective, accounting for 70 per cent of EM green bond issuance in 2018.
Reducing pollution is another urgent policy priority for Asian governments – none more so than India and China, the world’s most populous nations.
India aims to double renewable energy generation to 175GW by March 2022 and near triple that again to 500GW by 2030
World Health Organisation statistics reveal 70 per cent of the planet’s most polluted cities are in Asia, with India accounting for 15 of the top 20.
India aims to double renewable energy generation to 175GW by March 2022 and near triple that again to 500GW by 2030. China, meanwhile, has banned the import of plastic waste and is investing heavily in the development of electric vehicles.
It has been punishing violators and shutting down power plants, steel mills and coal mines. Its environmental fines increased 32 per cent year-on-year in 2018.
The Chinese government has also published guidelines that will make it mandatory for listed companies to disclose key environmental information by 2020.
Improvement in corporate disclosure is becoming more of a focus across the region. Since 2016, the Hong Kong Stock Exchange has required constituents to provide sustainability reports on a "comply or explain" basis. Singapore followed suit in 2018.
We would also expect Asia’s agriculture sector to come under increasing regulatory scrutiny as nations tackle challenges ranging from food security and water scarcity to combating pollution and improving labour practices.
The Association of Southeast Asian Nations as a bloc is the world’s largest producer of palm oil and natural rubber – both of which are essential raw materials. Yet the sector is riddled with sustainability risks, including deforestation and biodiversity loss, land grabs and forced labour.
Structural drivers, increasing institutional allocations and tightening regulations suggest Asia is set to close the gap to developed markets as a hub for sustainable investment. We think the region will present investors with a growing range of opportunities to generate positive returns and have a positive impact on the planet at the same time.
Aberdeen Standard Investments was an early signatory of the UN Principles for Responsible Investment in 2007.
Integrating ESG into our investment process allows us to have better insights into the drivers of value and risk at companies, and to better price and size our investments. With analysis we aim to avoid the pitfalls and capitalise on the opportunities.
1 Source: ADB’s Meeting Asia’s Infrastructure Needs, February 2017
2 Source: Green Bond Insights – Time for ‘transition’ bonds? – HSBC, 25 June 2019
3 Source: Climate Bonds Initiative, 2