High-net-worth investors and family offices across Asia are poised to start incorporating more environmental, social and governance (ESG) factors into their portfolio decision-making. In doing so, they will be catching up with investors around the world, and with many Asian institutional investors, that have been using ESG factors for years.
Demographic shifts and regulatory encouragement are among the factors that will lead to growth in ESG investing in Asia, according to a new study released this month by the Asia Venture Philanthropy Network, a Singapore-based funders’ network that works to encourage impact and socially responsible investing across the region.
While ESG investing has surged around the world, with some $23 trillion in ESG assets under management worldwide in 2016, just 1% of the total managed assets across Asia (ex-Japan) used ESG factors as of that year, according to data from the Global Sustainable Investment Alliance cited in the AVPN report. That compares to nearly 53% in Europe, 51% in Australia, 38% in Canada and 22% in the U.S. About 3.4% of Japan’s total assets under management use ESG factors.
The numbers in Asia are expected to climb rapidly over the next few years, AVPN says. “We are optimistic that ESG is an idea that’s just catching on right now, and that the rate of change is going to jump quite significantly in coming years,” says AVPN managing director Kevin Teo in an interview.
That jump will bring them more in line with institutional investors across Asia, says En Lee, head of Asia Pacific at LGT Impact, the impact investment arm of LGT, the world’s largest family-owned private banking and asset management group. ESG investing “is new for many families and high-net-worth investors, but has been an established investment strategy for many institutional investors like pensions, endowments, sovereign wealth funds and large asset managers,” he says.
Multiple factors have kept Asian high-net-worth investors from embracing ESG so far. A lack of access to data has long been a major stumbling block. Companies in Asia don’t disclose ESG data to the same degree they do elsewhere in the world, which makes it difficult at best to use ESG factors in investment decision making.
Another big factor is how Asians tend to think of their investments, according to AVPN. “Private investors in Asia have traditionally viewed investments and their social activities as separate and distinct,” the report says. Despite widespread philanthropic efforts across the region, there has long been some “resistance” to looking through an “integrated lens that incorporates these social impact factors into investment decisions and financial performance.” This mindset extends to Asian family offices, which in the past have mostly separated philanthropy from investment activity.
Beyond this, Asia has also faced a “knowledge and capability gap” that has prevented investors from having access to ESG products, even if they wanted them, the report says.
But things are changing. Among the reasons outlined in the report are some that apply worldwide, including a growing recognition by both asset owners and asset managers of the benefits of ESG investing, and the steady stream of studies showing that ESG investing does not, in fact, harm investment returns.
Indeed, that’s a crucial factor, says Lee. “There’s enough empirical data now to show that you don’t have to compromise — that you can actually get better long-term yields from investments when you integrate ESG factors,” he says.
That has helped drive what Lee calls a “shift of investor mindset.” When investors first started incorporating ESG factors, “it was seen largely as a risk mitigation strategy, a way to protect against financial, operational or reputational risks,” Lee says. “However, over the last few years, investors have seen real value in ESG considerations, and it’s gone from risk mitigation to a value alignment and value creation strategy.”
Another key factor in the regional growth of ESG, one more localized to Asian high-net-worth investors, is the transfer of wealth from one generation to the next. Millennial investors have proven to be more amenable to ESG investing, and 35% of Asia’s wealth will transfer to millennials over the next five to seven years, according to AVPN. That’s the highest rate of change in any region around the world. “Controlling a greater share of wealth will allow today’s millennials to advance the ESG investing agena,” the AVPN report says.
These increases in ESG interest on the demand side are being matched on the supply side. “There’s also been an increase in the number of sustainable investment products that investors can allocate to,” Lee says, including dedicated ESG funds, green bonds and impact investments. “We have also seen the rise of ESG-related index funds, which is driving more passive investing into the sector. These developments make it easier for high-net-worth investors to build sustainable investment portfolios.”
Among the recent products to come to market is a multi-asset investment product that UBS introduced in April for ultra-wealthy clients in Asia. It invests in both equities and bonds, all of which must meet ESG criteria, and is similar to a product that the company rolled out in Europe earlier this year.
Teo says AVPN has seen a steady growth in membership in in recent years — evidence, he believes, of shifting attitudes toward ESG and impact investing among high-net-worth investors. More concrete is what the group is hearing from large Asian banks and asset managers. “They come to us and say, ‘Our clients are asking us for information on ESG. What can we do to get our bankers up to speed?’” The banks are responding by educating their bankers and, in an increasing number of cases, starting to develop their own ESG-oriented investment products.
As they move toward ESG investing, Asian nations could follow the example of Japan, where ESG assets grew 70-fold in 2016. Factors behind this growth, according to the AVPN, include revised reporting standards; a new Japanese stewardship code; and, especially, strong and growing interest in ESG among Japanese institutional investors, including the world’s largest pension fund, the Government Pension Investment Fund. That institutional activity has started to trickle down to high-net-worth investors.
Challenges persist, including limited knowledge and skills in ESG investing, as well as a “lack of collective efforts by Asian regulators and governments in enforcing ESG policies as opposed to their peers in Europe,” the report says. While regulators in some countries are taking steps to encourage ESG investing, more needs to be done, AVPN says. Asian businesses and investors should work closely with governments to make the needed changes.
“Close collaboration with key stakeholders such as regulators and policy-makers can resolve the financing gaps that still exist in Asia’s sustainable financing ecosystem,” the report says, “and can align Asia’s future growth to a path of sustainability and stability.”