Institutional investors in the Asia-Pacific region expect environmental, social and governance (ESG) considerations to become increasingly core to their business as awareness builds among investors and policy-makers, according to a recent  survey.

The global survey, which was published by BNP Paribas and involved 356 asset owners, official institutions and asset managers, found that more asset owners and fund managers in Asia-Pacific say ESG plays a central, integral or necessary role today than in the same survey two years ago, and only a small minority of respondents expect ESG will still not be integrated in two years’ time.

However, barriers to further adoption remain: 79% of respondents cite inconsistent data quality across asset classes as one of the top five hindrances, and 72% name data quality and consistency challenges.

Key findings of the ESG Global Survey 2021 include:

•  Commitment to ESG is growing across Asia-Pacific: Today, 15% of investors say ESG is central or a necessity to investment strategy – and this number is anticipated to jump considerably to 37% in two years’ time.

•  Singapore has an early lead: Singapore leads other Asia-Pacific markets in terms of how central ESG is to the current investment strategy. But in the next two years, investors see a sizeable rise in ESG’s incorporation as a necessity in investment strategies in Australia and Hong Kong.

•  Hong Kong will make strides: Currently, no investors in Hong Kong regard ESG as essential, but this will change: 24% expect it to be central to investment strategy and another 24% say it will be a necessity in two years’ time.

•  Reputation is the strongest ESG driver: Brand and reputation are the strongest drivers for APAC investors to incorporate ESG in investment decisions. More than half (57%) say this is the primary driver for this choice – a slightly lower percentage than the global figure of 59%.

•  Drivers differ by market: China and Singapore cite reputation as the strongest driver of ESG integration, but in Australia, external stakeholder requirements lead (68%), with reputation sitting in fourth place at 32%. Hong Kong is also motivated by external stakeholders (48%), but in Japan, better long-term returns drive ESG integration, cited by 64%.

•  Greater preference for ESG in private capital: While equities top the list of asset class preferences for ESG adoption, Asia-Pacific’s 58% is lower than the global figure 69%. A larger percentage say they apply ESG to private equity and debt (43% versus 38% globally). Investors in Australia show a greater propensity for using ESG in real estate (54% versus 32% Asia-Pacific; 37%, globally). 

•  Private capital for China and Japan: A larger portion of investors in China use ESG for infrastructure investments (91%), while green instruments are more prevalent among investors in Japan (64%).

•  Performance remains a question: A greater portion of Asia-Pacific investors believe ESG is constrained by a lack of conviction in its ability to improve long-term performance (65% versus 52% globally). This barrier is a primary apprehension for investors in China and Hong Kong and both Australia (68%) and Singapore (55%) rate it of higher concern than the global average. 

•  Cost is a concern: 48% of Asia-Pacific investors also see the cost of new technologies as a barrier to ESG integration, versus 39% globally, with those in Hong Kong (67%) most likely to highlight cost as an impediment.

•  Leadership is needed: The proportion of investors in Asia-Pacific who say lack of backing from senior leaders holds back ESG adoption is higher than that globally (33% versus 23%). This is also highlighted as a barrier by investors in Singapore (45%), Japan (45%) and Australia (39%); those in China and Hong Kong do not cite this as an issue.

•  Inconsistent ratings: While 54% of investors are concerned about conflicting ESG ratings or indices, this is lower than the global average of 68%, although those in Australia (68%), Hong Kong (67%) and China (64%) do see this as a problem. Japan’s 36% drives down the regional average. 

“The diversity of the Asia-Pacific region is reflected in the results of this year’s survey, but what is clear is that change is happening swiftly, with ESG playing a rapidly increasing role in investment decisions,” says Nadim Jouhid, head of investment solutions at BNP Paribas Securities Services, Asia-Pacific. “The preference among many Asia-Pacific investors for private assets as a route to ESG investing points to the region’s significant variations in outlook compared to the global survey base.”