Why Asia could soon dominate responsible investing

Lisa Beauvilain, Head of Sustainability and ESG at Impax Asset Management says businesses in Asia have made progress on establishing investor relations teams.

However, she adds, there is a long way to go, with executive pay one glaring absence. In Japan the decision taken by the $1.5tn Government Pension Investment Fund two years ago to begin tracking ESG indices is seen as marking a decisive shift, which prompted others in the country to consider responsible investment. However, corporate pension plans in Japan lag behind their public counterparts in this regard. When it comes to China the feeling is that things are going in the right direction. Asia’s largest economy wants ESG reporting for publicly traded companies to become mandatory in 2020 although there is a lack of clarity on how this will look in practice.

The following is an article in this regard by 'Nigel Green', who founded deVere Group in 2002 from a single office in Hong Kong after discovering a niche market for expatriates in the financial services sector, entitled: "Why Asia could soon dominate responsible investing." The article was taken from the 'Asiatimes.com.'

Responsible investing, also known as ESG investing, can be expected to dominate the investment world in this new decade – and Asia could, ultimately, lead the way in this arena.

Let’s break down the ESG abbreviation. “E” is for “environment” and includes issues such as climate-change policies, carbon footprint, and use of renewable energies. “S” is for “social” and includes workers’ rights and protections. “G” is for “governance” and includes executive compensations, diversity of the board, and corporate transparency.

There’s no doubt that ESG is becoming a major phenomenon. The Global Sustainable Investment Alliance says such investing now totals an impressive US$31 trillion, an $8 trillion increase since 2016.

Currently, the US and Europe lead the charge in ESG investment, with a mighty 80% of the responsible-investing market.

Perhaps an example of how powerful ESG has become in recent years is that in 2019 in the UK for the first time in history more of the country’s energy was generated by renewable or green energy sources than by fossil fuels.

Similarly, Denmark hit a major renewable-energy milestone in 2019, producing nearly half of its electricity from wind power alone.

This hasn’t happened overnight, of course. It takes years of policy shifting, infrastructure building and, importantly, the will of investors.

While Asia might currently be lagging behind in terms of market share in the ESG investment space, there are several key reasons this can be expected to change over the next decade.

First is demographics. According to Global Data, by 2025, Asia will be home to 33 of the world’s 49 megacities. The rise in the number of megacities – cities in which there are more than 10 million permanent residents – will be fueled by millennials.

Countless studies show that members of this generation are more likely to take into account ESG factors before investing than other generations before them.

In addition, the “Great Wealth Transfer” will see an estimated $68 trillion pass down from baby-boomers to their millennial children over the next couple of decades – and it could make them even richer than previous generations. It’s expected that this significant wealth transfer will begin in the next few years.

Second, we can already see important shifts in Asia in the ESG direction. For example, China became the world’s second-largest green-bond issuer in 2018, just being pipped to the top spot by the US. Another example would be that in 2019 Asia had more stock exchanges with compulsory environmental, social ESG reporting than any other region in the world.

Third, there is an increasing amount of evidence and ongoing research that show financial returns are not diminished – indeed they’re often boosted – by those companies that offer ESG-compliant investment. This will not have gone unnoticed by either retail or institutional investors in Asia and will continue to do so.

And fourth, ESG investing will allow governments across Asia to realize and shore up some of their wider major policies. These include shrinking labor forces and weakening economic growth, migration, climate change, and global low-carbon transition threats.

For these reasons, while Asia doesn’t yet lead the charge in terms of responsible investing, it could well do so by the end of the 2020s. The need and demand for ESG investment are growing – and this is likely to be just the beginning.

ME