by Jessica Robinson, CEO, Association for Sustainable & Responsible Investment in Asia (ASrIA) and the Asia Investor Group on Climate Change (AIGCC)
Asia – A Market With Huge Potential
Asia is a region full of contrasts: it is home to some of the wealthiest individuals, but it also shelters some of the poorest nations. The challenges faced by the region are unique and complex, and the need for sustainable and responsible investment is greater now than ever. Financial markets and their actors are often accused of being part of the problem. And yet, at this critical time, there is an opportunity for Asia’s financial markets to be part of the solution.
The good news is that we are seeing a steady growth in sustainable investment assets across the Asia market and the indications are that environmental, social and governance (ESG) factors are increasingly on the agenda for mainstream investors.
Yet progress is still limited and the figures are slight in relative terms, with most markets in Asia remaining in the early stages of development, but we are seeing positive developments in areas such as sustainability-themed funds, renewable energy investment and a rapidly increasing interest in green bonds.
These emerging trends clearly point to a dynamic market with huge potential, although much of the growth in this sector remains slight in relative terms. The question now becomes how to seize on this potential to ensure that capital allocation towards sustainable growth and development happens at the scale and speed needed in the region.
Where Do We Stand? The Current State of Sustainable and Responsible Investment (SRI) in Asia
While the potential is obvious, SRI in Asia is very small relative to elsewhere in the world, with less than approximately 1 percent of assets being considered ‘sustainable investment assets’. However, in ASrIA’s 2014 Asia Sustainable Investment Review, our research identified a year-on-year increase of 22 percent in assets under management (AUM) since 2011. Of course, while this positive growth is good news for the region, understanding what is driving it is critical to developing the market.
Importantly, our research found that key motivations for investors include both the financial opportunity associated with sustainable investment prospects but also it is about smart risk management. Given the complexity of the sustainability challenges facing the region, these motivations are aligned with expectations but interestingly our research also found that there is an increasing concern over fiduciary duty.
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Stewardship is a growing concept in many Asian countries, with the recognition that sound stewardship and responsible ownership are both essential for long-term value creation and protection on a national and regional level. Japan’s decision to introduce the Stewardship Code in 2014 was a first for the region. In Hong Kong, the Securities and Futures Commission is in the process of consulting on guidance outlining principles of responsible ownership, with other countries likely to follow suit in the foreseeable future.
However, to a degree, Asia is still stuck in a ‘grow now, fix later’ mentality, despite the increasingly significant problems associated with natural resource depletion, climate change impacts and environmental degradation, in addition to the empirical links between these issues and social instability. That said, recent steps taken by a number of Asian governments, in particular that of China, bring many reasons to be hopeful that the policy landscape will dramatically shift. This shift is critical if the region is to respond to the massive and complex challenges facing it.
Undoubtedly, from the investor perspective, this dynamic brings both risks and opportunities with macro themes, such as changing demographics and urbanization, playing a significant role at both a regional and national level.
The Changing Investment Landscape in Asia – Where is Change Occurring and Where is it Needed?
Asia’s investment landscape is clearly changing. In particular, ESG disclosure requirements are proving to be an important force, with stock exchanges in countries including Hong Kong, Singapore, Taiwan, Malaysia and China issuing ESG disclosure guidelines. While most are still voluntary in nature, it is expected that Asia’s stock exchanges will follow international trends and progress to mandatory or ‘comply or explain’ guidelines in the foreseeable future.
What is very clear is that investors are looking for clarity and certainty in transparency requirements – and the sooner this is in place the better to really enable Asia’s investment industry to move forward on integrating ESG issues.
However, ESG disclosure in itself, while an enabler and a necessary condition, is not sufficient for the wholesale shift in investment climate that is needed across Asia. The conversation can and must move from niche players to mainstream industry. In order for this to happen, Asian governments need to create more assertive and ambitious policy frameworks that put sustainability priorities at the heart of growth models. Hearteningly, in some countries, this type of policy leadership is starting to emerge.
South Korea, for example, has been a pioneer for ‘green growth’ by incorporating specific objectives within national development strategies, notably introducing the National Strategy for Green Growth (2009 – 2050) and embedding the concept with the Five-Year Plan (2009-2013), both of which have become a blueprint for South Korea’s transition to a low-carbon economy.
China has emerged as an international front-runner on several fronts – for example, the introduction of emissions trading schemes which will go nation-wide next year, increasing efforts to improve transparency and disclosure (particularly on environmental risks) and the recent establishment of a Green Finance Task Force – co-convened by the Peoples’ Bank of China. The purpose of the Task Force is to develop policy, regulatory and market-innovations that incorporate the requirements of sustainable development and green finance within China’s financial system, with the Chinese government’s commitment to the sector seen by many as a regional game-changer.
These developments aside, financial market reform also needs to form part of the overall ‘sustainability infrastructure’, with regulatory actions required for addressing ever-apparent market failures. Increasingly supervisory frameworks may seek to incorporate certain risks – such as climate and carbon risk – into the regulation of Asia’s financial markets. Regulators in countries such as Indonesia are taking this very seriously and are currently assessing options for fundamental financial market reform.
Where Next for Asia? Ahead of the Curve on Sustainable and Responsible Investing in Asia
As Asia-based investors look ahead, it is clear that success will be based on a number of factors including how investors identify and leverage the value of ESG data to better understand the specific regional and country risks in the region. Investors who are successful in Asia will be able to use this analysis to determine and then seize certain market opportunities, in particular those integral with sustainable growth such as green infrastructure, resource use and efficiency.
Across the region there are concerns around governance, with high levels of corruption acting as a speed break on many investments, often compounded by problems of political instability in countries such as Thailand. This should not, however, overshadow the progress made by countries in addressing these concerns – while China may lead headlines with its ‘war on corruption’, through the concerted efforts of the government of Thailand and regulators’ efforts on corporate disclosure and governance practices, Thailand rose to 3rd in the Asia Corporate Governance Association’s most recent CG Watch.
For investors based outside of the region it is important to connect with on-the-ground organizations and networks to better understand and appreciate the material ESG risks and opportunities at a country level, and stay informed on critical changes to the policy, regulatory and financial environment.
Of course, the biggest future potential influence at a regional and national level will be climate change.
Climate Change is an Important Issue for Investors
Climate change is now weighing heavily in the minds of many of Asia’s investors. ASrIA’s 2014 Sustainable Investment Review confirmed that investor concern about climate change is on the rise, with a large proportion of survey respondents (72 percent) now taking climate risk into account. Based on this research, it seems that this is an issue for both dedicated sustainable investment managers as well as more mainstream asset managers, with the expectation that its significance will continue to rise – 62 percent of respondents expect climate risk will be more important in the next two years.
This is also reflected in the gaining momentum of sustainability-themed investment strategies, the fastest growing segment with 56 percent growth per year since 2011, reflecting the rising importance of ESG issues related to climate change, such as energy and water security, in the region.
Investors’ growing concerns over sustainability issues, particularly related to the consequences and impact of climate change, form an important incentive for the development of the sustainable investment market in Asia.
Concluding Comments
2013 and 2014 have been important years for sustainable investment in Asia, with the announcement of significant green financing initiatives in key countries such as China and Indonesia. We have also seen other heartening developments such as the issuance of Asia’s first green bonds and widespread progress on ESG-related disclosure policies.
However, the understanding of ESG risks – and the integration of this analysis into core investment decision making – is still at the early stage of development. One of the most significant barriers to growth is the lack of ESG capability and expertise within the investment industry itself.
In some countries progress is being made but the mainstreaming of sustainable investment requires closer collaboration between policy-makers, regulators and the investment industry. This collaboration can work towards creating a more conducive and supportive policy environment, prioritizing actions such as improving transparency and disclosure, standardizing the market and reducing transaction costs that will help sustainable investment practices thrive across Asia.
Article by Jessica Robinson, CEO, Association for Sustainable & Responsible Investment in Asia (ASrIA) and the Asia Investor Group on Climate Change (AIGCC).
As Chief Executive of AsrIA (www.asria.org ), Jessica is responsible for directing and implementing the strategy and activities of the organization. ASrIA is one of Asia’s leading think tanks, working to promote sustainable finance and responsible investment across the region through providing thought leadership, industry engagement, capacity-building and advocacy support.
Jessica also has responsibility for the Asia Investor Group on Climate Change (AIGCC), an ASrIA initiative, assisting Asia’s institutional investors in considering the risks and opportunities associated with climate change and low carbon investing.
In her position, Jessica plays an active leadership role in the Global Sustainable Investment Alliance (GSIA) and the Global Investor Coalition on Climate Change (GIC), of which ASrIA and AIGCC were founding partners. She is also a member of the Board of Directors of ASrIA.
Jessica has an extensive background in professional services and business consulting, focusing on the financial services, environmental finance and sustainability industries. Through varied roles, she has had experience of working and living in Asia (in particular, China and Hong Kong), Europe and North America, and across a range of different sectors, markets and regulatory environments. She frequently contributes articles, authors reports and speaks at conferences on issues including green financing, financial market developments, climate finance policy and broader sustainable finance issues. She also provides input to several advisory panels and working groups on green finance and sustainability issues.
Beginning her career working for a member of the UK Parliament, Jessica has worked in a number of policy and public affairs roles, subsequently joining one of the ‘Big Four’ professional services firm as a consultant, providing advisory services to a range of financial institutions including investment banks, insurers, reinsurers and asset managers, notably on issues related to governance and risk management. Thereafter working in environmental and carbon financing, she was a director of a leading China-based developer of energy and emission reduction solutions, in addition to working with a number of start-ups in the Asia-Pacific region.
She holds an MSc in Applied Environmental Economics from the University of London, an MSc in Politics from the London School of Economics and a BA in Economics from the University of Manchester, UK. She also holds a Professional Diploma in Financial Management from the ACCA and is currently studying for the FT Post-Graduate Diploma for Non-Executive Directors.
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PHILIPPE: My inspiration for GIVE is rooted in the legacy of my family. That legacy goes back three generations and at its core seeks to find innovative ways to solve some of the biggest challenges facing our planet. My grandfather started out back in the 1940s as the co-inventor of the scuba diving “aqua lung” as they called it and then went on to invent various other underwater submersibles, cameras, scientific techniques and more, eventually becoming a pioneer in ocean conservation. My father, Philippe, Sr., continued with that work but unfortunately, his time was cut short when he passed away in an airplane accident in 1979. My father was also very much an innovator, and explored the world, thinking differently about how we approach and solve problems, and his life’s work inspires me every day.
PHILIPPE: Annual charitable giving in the U.S. is about $300 billion. It goes up and down based on the economy. The simple fact is that it’s not enough. From hunger and disease to the environment and mental illness – almost any issue that we’re facing today lacks sufficient financial resources to overcome the problem. GIVE, tries to find a better way – an innovative opportunity where people can make money and still support philanthropic causes. In this case, that cause is the GlobalECHO Foundation, which seeks to find high impact projects to support that can really move the needle, and that means investing in people as much as investing in direct conservation. My grandfather always told me, we can’t achieve environmental sustainability without human sustainability. That’s why we support projects that include women and children, environmental education and micro enterprise. While I am an environmentalist at heart, I realize that we have to help build healthy sustainable communities if we are going to tackle the kinds of major environmental challenges we face, from deforestation to carbon pollution – particularly in the developing world.
PHILIPPE: The Panzi Hospital in the Eastern Congo represents a great match for the GlobalECHO Foundation’s goals. We recognized there was an important opportunity to support an organization, which helps rebuild the lives of women who have survived sexual violence, and provides maternity care and education in a part of the world that desperately needs it. The heartbreaking and inspiring story of Furaha and her six year old daughter illustrate the power of investing in projects like the Panzi Hospital. Furaha and her young daughter suffered a brutal gang rape that left them physically and psychologically scarred, infected with HIV/AIDS, and with few options to support themselves as Furaha’s husband was also murdered in the attack. Through the work of the Panzi Hospital and the Panzi Foundation, Furaha and her daughter were not only given comprehensive medical and psychological treatment, but Furaha was also provided with a modest micro-loan to invest in a business and her daughter now has guaranteed enrollment in a local school. Today, Furaha has a successful business, which enabled her to purchase land and a home for her and her daughter. The GlobalECHO Foundation and GIVE have supported the installation of solar panels for the hospital laboratory, which are now driving clean, renewable, affordable – essentially free – energy to the facility to replace a very expensive, conflict-ridden dirty fuel that has traditionally powered it. 
In so doing, we’re saving the hospital money so they can serve their patients better and treat more women and children like Furaha and her daughter, thus building a healthier and more resilient community; we’re also helping to reduce pollution in the community because they’re not using fossil fuels; and the project has become a green jobs initiative that provides training jobs in sustainable energy systems for people in the community. It’s tremendous to see this success based off GIVE, and fundamentally, recognizing that this model can be a successful one and represents an exciting example for the future. As we continue to grow, we look forward to adding more projects like the Panzi Hospital to our philanthropic portfolio.