According to an MSCI survey, ESG investments in Asia-Pacific increased in 2020 as sustainable investment rallied
Chinese tourists wear masks as protection from pollution outside the Forbidden City during a high pollution day in Beijing, China.
Sustainable investing is picking up momentum in Asia Pacific as institutional investors accelerated their environmental, social and governance (ESG) investments during the coronavirus pandemic last year.
ESG investments prioritize a company’s positive contributions to its community, the environment and social impact. By evaluating companies against ESG metrics, socially conscious investors can review potential investments for their investment goals and values.
The global pandemic has increased the importance of ESG issues to investors and has made it clear how catastrophic events such as climate change would affect investment returns.
According to a recent survey by MSCI 2021 Global Institutional Investor, around 79% of investors in Asia Pacific have “significantly” or “moderately” increased ESG investments in response to Covid-19.
This is a slightly larger proportion than the 77% of investors worldwide who made sustainable investments over the period. Overall, the number at the largest institutions or those with assets of over $ 200 billion rose to 90%.
Meanwhile, 57% of Asia Pacific investors expect ESG issues to be “fully” or “largely” incorporated into their investment analysis and decision-making processes by the end of 2021.
“ESG and climate were once a green fund and pocket issue and are now firmly established as high priority topics,” said Baer Pettit, president and chief operating officer of MSCI, in the report. “2020 was a profound change in the way institutions invest as many investors realized that many companies with strong environmental, social and governance practices outperformed during the pandemic.”
MSCI, a leading index provider, surveyed around 200 sovereign wealth funds, insurers, foundations and pension funds with total assets under management of $ 18 trillion. About 70 of the institutions were from the Asia-Pacific region.
“ESG analysis and integration are increasingly mainstream in APAC, and adoption rates have increased during the pandemic,” said Gabriel Wilson-Otto, global head of sustainability research at French bank BNP Paribas Asset Management, in an email interview .
This is mainly because Covid-19 “has put corporate behavior, corporate resilience and broader sustainability issues first,” he noted.
“The human costs of the pandemic have underscored the importance of resilient health systems and the treatment of employees, and contributed to the record social bond issuance in 2020 as investors sought to channel capital into solutions,” said Wilson-Otto.
He added that a key driver is the growth of “value-based” investments in thematic and ESG-integrated investment products, supported by a generational change. A second related driver is the increasingly favorable profitability of investments in the energy transition and other sustainability solutions.
“As a result, the focus has shifted from ‘ESG integration can hurt ROI’ to a growing recognition that sustainable business practices can be reconciled with corporate resilience,” said Wilson-Otto.
Effects of climate change
In particular, some countries in the Asia-Pacific region are leading the way on climate change considerations.
Around 50% of investors in Asia Pacific countries, with the exception of Australia, New Zealand and Japan, consider climate change metrics for decision making, compared to the global average of 42%, the MSCI report shows.
“The reality is that climate change is linked to a rapidly changing social context which in turn drives changes in investor requirements in a very dynamic regulatory environment,” Pettit said in the report. “These trends are reinforced by technological innovations, which cause considerable cost and time pressure. Investments have simply never been a more complex ecosystem.”
Despite assuming a position with higher carbon emissions, there is a growing awareness of issues related to climate change in the Asia-Pacific region and an ambition to address its effects, said Wilson-Otto.
“The numerous net-zero emissions targets announced by Asia-Pacific countries towards the end of 2020 show how quickly the political landscape can change,” he added. This is further exacerbated by the “strong growth in the incorporation of ESG analysis into investment decisions in both China and India”.
China remains the world’s largest greenhouse gas emitter, responsible for 28% of global emissions – more than the US and the European Union combined.
Surprisingly, Chinese President Xi Jinping promised in the United Nations General Assembly last year that the country would be climate neutral by 2060. Similar commitments from Japan and South Korea soon followed.
“The government’s increased focus on addressing China’s environmental problems over the past 10 years has been a direct driver for many emitters to turn environmental problems into financial problems,” said Wilson-Otto.