Sustainable investment in Asia

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Few would have forecast a few years ago that China would emerge as the world’s second-largest green bond issuer in 2018; or that Abenomics would transform Japan into the world’s fastest-growing sustainable investing (SI) market; or that in 2019 Asia would have more stock exchanges with mandatory environmental, social and governance (ESG) reporting than any region in the world.

Attitudes toward sustainable investment in Asia have changed radically in just a few years. While it has become evident that governments must lead in Asia to produce meaningful change to sustainability challenges, there has also been indirect pressure from the wider public on governments and corporations, particularly on issues relating to climate change and air pollution, which affect people every day in Asia’s cities.

Asia embraces sustainable investing

A key driver of Asian governments’ recent policy shift toward SI has been the realization that sustainability linked investment can help tackle broader policy concerns; from shrinking labor forces and slowing economic growth, to migration and infrastructure, climate change and low-carbon world transition risks.

Asian asset owners have embraced SI because of the increasing acceptance that SI does not compromise financial returns or performance. For long-term investors, including pension funds and insurance companies, SI can lower downside risk from “stranded assets” created by climate change and transition risk. For credit investors, good corporate governance, the central pillar of ESG, can help lower credit risk.

In emerging markets, ESG equity strategies have shown outperformance relative to broader benchmarks, which may be due to smaller perceived tail risks of companies with good corporate governance.

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Japan: a model for the rest of Asia?

Japan has been a key driver of sustainable investing in Asia. Since 2017 it has led the push into sustainable investment through the Government Pension Investment Fund. In just three years to 2018, SI assets managed sustainably in Japan surged from virtually nothing to 18% of total assets under management. Japan has become the fastest-growing SI market worldwide.

Climate change: a key driver

Asia is estimated to need USD 1.7trn a year in infrastructure investment to sustain current growth rates in an increasingly low-carbon world.

The need to finance green projects should boost demand for green bonds and green financing. Asian green bond annual issuance could triple to USD 150bn in the coming years. China, Hong Kong and Singapore are paving the way as SI hubs in the region, with China leading the EM green bond market.

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