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Sustainable investing gaining ground in Asia
Pension fund investors show growing interest in foreign equities and alternatives
The Asset 6 Sep 2021

Sustainable investing continues to gain ground in Asia, with governments, pension plans and asset managers moving to incorporate environmental, social and governance (ESG) factors into their investment strategies, a new study finds.

Globally, most pension fund investors stayed the course with their asset allocation, even amid heightened volatility and uncertainty over the last year, according Mercer’s Asset Allocation Insights 2021 report.

Foreign equities now represent 51% of aggregate equity allocations globally, the first time since 2013 that exposure outside of investors’ home markets tipped over the midpoint.

The New York City-based asset manager says the report reflects growing interest in sustainable investing across the regions, in some cases accelerated by the Covid-19 pandemic, as stakeholders sought to address both economic recovery and sustainability objectives.

In Hong Kong and Taiwan, ESG factors are being considered within investment decisions, and Indian mutual fund companies have begun launching ESG-focused products.

Green bonds

The South Korean and Philippine governments have each demonstrated a commitment to ESG through investments in green bonds, with South Korea specifically tying their objectives to social themes to support the economy in the choppy Covid-19 environment, according to Mercer.

Mainland China has shown leadership in pursuing sustainable growth policies, with growing interest from Chinese asset owners and managers incorporating ESG into their investment approach, the report says.

Asset allocation for the Asia ex-Japan region is broadly aligned with the overall survey’s aggregate allocations. However, it has the highest allocation to alternatives (about 8%) among all regions (given the size of the Japanese pension system, including the Government Pension Investment Fund (GPIF).

Over the past few years, Asia (excluding Japan) investors have held allocations fairly steady, with modest increases to alternatives over the period. Investors in Hong Kong and Taiwan have the most aggressive asset allocation among all jurisdictions. Hong Kong has a 60% allocation to equities, whereas Taiwan has a 41% allocation to equities and 10% to alternatives.

South Korea has the highest allocation to alternatives among all Asia markets at 11%, which has been increasing over the period. Conversely, India’s fixed-income allocation is significant at close to 90%. Japan has transitioned from having one of the most conservatively positioned asset allocations to one of the most aggressive. The fixed-income allocation decreased from 59% to 45%, largely due to changes within the GPIF.

Foreign equities

Within the equity portfolio, assets have shifted to foreign equities, with the current period average of 48% up from 34% seven years ago. Shifts in Taiwan and Malaysia have contributed to this. Foreign fixed income has remained a relatively low portion of the fixed-income portfolio and remained largely flat over the period at 9%.

“We expect continued growing interest in alternatives as investors seek to enhance portfolio yield amid sustained coronavirus-related uncertainty,” says Janet Li, Asia wealth business leader at Mercer.

“The allocation tilt towards foreign equities is a natural evolution as funds develop and become more mature. Diversification from home markets help to mitigate concentration risks and create more return drivers. It is encouraging to see the acceleration of [ESG] investments whether via an increase in market awareness or portfolio allocation. This is a clear recognition of the growing impact of global systemic risks on investment returns with ESG considerations becoming fundamental for investors.”

The report summarizes the investment strategy decisions pension fund investors are taking in Latin America, the Middle East, Africa and Asia – representing more than US$5.3 trillion in assets under management.

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