It is no secret that awareness of environmental, social and governance (ESG) issues has been on a steep upward trajectory in the Asia-Pacific (APAC) financial industry, driven by growing interest from the community and government, coupled with increased client interest and demand. However, while awareness has been surging, end investors may not be confident in the value of implementing ESG factors in their portfolios.
Successfully advancing ESG considerations in the region will require a clear articulation of the investment case for ESG, and a careful examination of which ESG issues are most relevant for each specific market, industry and company.
Trends and industry challenges
Asset managers across APAC have seen accelerated demand for ESG funds and growth in assets under management. Yet there is still confusion about what ESG strategies entail – no surprise when you consider that the term ‘ESG investing’ is typically used to cover many different approaches, from funds that integrate analysis of ESG considerations into the investment process, to strategies such as negatively screened ethical funds, thematic sustainability funds and impact investing.
There is little doubt that investors need to understand the ESG issues within their portfolios in order to fully evaluate investment risk. Investors also have a critical role to play, through their product and investment decisions, in financing the solutions to sustainability challenges; these include the transition to a low-carbon economy and the adaptation to climate change impacts. Regular engagement with high-emitting investee companies is essential for investment firms so they can obtain a good understanding of their climate risk exposure, challenge emitters and promote industry best practice in climate risk management.
While facing significant sustainability challenges, the APAC region may also hold the key to how fast and effectively the world can respond to these challenges. Financial institutions cannot solve these sustainability challenges alone, but they certainly have a role to play. To that end, Abrdn’s Sustainability Institute, APAC, is staging its first Sustainability Summit APAC in May 2022 to bring together like minds to discuss trending topics in sustainability, such as, climate change, biodiversity loss and the UN Sustainable Development Goals, and to inspire further action.
Climate change: managing the transition
Perhaps the biggest sustainability challenge the world faces is climate change. For investors, it is vital to think beyond the consideration of an asset or portfolio’s carbon footprint, and understand how investments will perform and be impacted under different climate change scenarios. Scenario analysis involves modelling the effect of different climate outcomes – including different climate policies and alternative technology development paths – on asset prices.
We believe that the climate crisis will not be solved by simply divesting from high-carbon intensity stocks into lower-carbon options. Real-world change will come from backing credible transition firms on their path from high- to low-carbon intensity. While investors can play an important role in the shift to a low carbon future, avoiding the worst impacts of climate change will depend largely on government policy. So, regulation is a vital requirement on the road to net zero.
Recently, central banks and regulators across the region have been increasingly focused on the financial materiality of ESG risks, particularly in the case of climate change. For example, in April 2019, Hong Kong's Securities and Futures Commission (SFC) issued a circular as an initial step to enhance the disclosure standard of ESG funds to improve their comparability, transparency and visibility. This year, the SFC introduced more robust disclosure requirements for such funds.
Meanwhile, the Monetary Authority of Singapore has been moving towards a more detailed and prescriptive approach to ESG issues, including guidelines issued in 2020 for the environmental risk-management practises that asset managers should aim to adopt.
The role of financial institutions – we all need to do more
Although parts of APAC are still behind the rest of the world in deploying sustainable investment strategies, the region is moving fast to respond to client demand and developing regulatory frameworks. Drawing on its global and regional ESG expertise, Abrdn saw an opportunity to promote positive change in the industry through the establishment of a Sustainability Institute in APAC in 2021, which is supported by ten dedicated sustainability experts in the region, and backed by an even larger team of sustainability experts globally. The aim is to drive sustainable solutions for clients and embed ESG investing capabilities and infrastructure across the region.
There is no doubt that ESG talent supply in the region is currently falling well short of demand. ESG skills are hotly pursued and will be sought-after across investment firms into the future, not just within investment teams, but also in other areas like regulation and product strategy. So, it is important for firms to attract, grow and retain sustainability and ESG talent. Abrdn is addressing this issue in a number of ways, including, this year, transforming its APAC internship programme into the Grow Sustainably Early Careers Internship Programme (in which all interns have a sustainability-focussed placement) to develop a new generation of visionaries with ESG-related expertise for the financial industry in APAC.
The importance of investing sustainably and responsibly is here to stay. Our aim is to materially contribute to the growth and development of this future-forward way of investing for the benefit of the investors of today and tomorrow.
Danielle Welsh-Rose, head of sustainability specialists and APAC sustainability, Abrdn.