Significant interest and developments in sustainable investments are on the rise in Asia, driven by institutional investors, private banks, family offices and socially conscious millennials, according to Cerulli Associates' newly-released report.
Entitled ESG and ETFs in Asia 2019: Assessing the Impact and Potential, the report looks at the extent of environmental, social, and governance (ESG) adoption varies according to the stage of development and awareness in each market. Jurisdictions such as Australia and Japan are ahead in embracing ESG investment principles. ESG factor integration is the most popular strategy used in Australia. Japanese institutional investors tend to use the governance factor the most and prefer positive screening.
In the rest of Asia, the ESG drive is spearheaded by the largest asset owners such as pension funds and sovereign wealth funds, Cerulli states.
"Across Asia, ESG is gathering momentum in the form of various initiatives," said Leena Dagade, an associate director at Cerulli. "As key challenges in terms of data disclosures are addressed, the pace of ESG adoption will only increase.
"Slowly but surely, ESG data disclosures from companies should gradually improve over the next few years as investors (whether managers or asset owners) come to understand the implications of ESG risks to their portfolios. Over the medium term, ESG is expected to become an integral part of fundamental analysis."
Fund managers are responding to the changing paradigm and ramping up their ESG capabilities, the report added, with those that can demonstrate their expertise in ESG standing to gain the most. "With ESG expected to become an integral part of fundamental analysis, managers must strive to embrace these principles sooner rather than later," Dagade added.
In terms of asset classes, asset owners are keen to employ ESG principles in equities and alternatives. However, assets under management (AUM) held in sustainable investments by Asia ex-Japan locally domiciled funds comprise just a tiny fraction of total mutual fund assets in Asia, according to Cerulli's estimates.
"Nevertheless, catalysts such as developments in global markets, pressure from top institutional investors, and the preferences of emerging millennial investors are likely to grow the proportion over the medium to long term," added Kean Yung Siau, an associate analyst at Cerulli.
Even as curiosity over ESG is increasing across Asia, the industry is faced with challenges on various fronts. These include defining and interpreting ESG, and the perception that ESG means sacrificing performance. Asset owners see ESG playing a role in addressing or reducing the risks of investing, but they rate ESG's role in improving performance the lowest. As for retail investors, one of the major hurdles is their short-term investment horizons, Cerulli concluded.