In spite of a challenging global economy, an evolving regulatory environment and political pushback in the US, interest in sustainable investing (SI) in Asia remains robust as environmental issues are among the top drivers for investors in the region.
On a recent Asian trip, Sarah Bratton Hughes, senior vice-president and head of environmental, social and governance (ESG) and SI for the US$187 billion investment firm American Century Investments, shares her observations on the current state of SI in Asia.
The Asset (TA): With a growing number of impact and sustainability funds coming into the market, how important is it now for these funds to be approved by a third-party impact verification and intelligence provider?
Sarah Bratton Hughes (SBH): While we believe that third-party certification is a best-in-class approach, there is no short cut for old fashioned due diligence by fund selectors. Third-party certification may be helpful in selectors culling the fund universe, but they should be aware that sometimes the process is costly and could unfairly eliminate innovative and robust product solutions run by smaller and emerging managers.
TA: Europe has its Sustainable Finance Disclosure Regulation, but as Asia, with its many and varied national interests, is not as homogeneous as Europe, should the region at least aspire to have its own Asian version of this?
SBH: As SI reaches its pre-teen years in terms of maturity, we continue to see regulators globally either propose or enact sustainability-related regulations. We believe, in the absence of global standards, that this is the role regulators should play (much like a parent-enforcing boundaries for a pre-teen – I say that as a mother of a son quickly approaching those years).
TA: In the wake of your most recent international trip, how does Asia stack up against other regions when it comes to adopting green regulations, sustainability and impact investing? Is the region ahead or behind?
SBH: I am enthusiastic about the energy around SI in Asia. And while there is an impression that Europe is the global leader in SI – and that might be true from the regulatory perspective – Asia is establishing itself as a hub of SI innovation. There are significant advancements as well as leadership in the carbon markets, biodiversity and the Just Transition. While the regulatory environment in Asia is still in flux, this puts regulators in the unique position of being able to learn from other jurisdictions.
TA: While institutional investors have been pushing companies to improve their ESG practices in Asia, are the Asian institutions doing enough?
SBH: We have continued to observe a rising interest in SI from Asian institutions across the spectrum, from those that are leading innovators in areas like carbon markets and biodiversity to those that are on an earlier part of their journey and looking to educate themselves more.
TA: Do you think there are enough ESG, SI, green products for investors in Asia to invest in?
SBH: We believe we are approaching a paradigm shift in how investors approach SI – from best-in-class investing to also focusing on best in progress. Given the many uncertainties facing the market right now, we think it is helpful to explore the value and sustainability relationship.
Many investors mistakenly believe that SI is mostly about the buying stocks of companies that have low carbon emissions (and shunning those that don’t). That’s tunnel vision and really misses the big picture. Another oversimplification is that SI focuses on companies that have the highest ESG rankings from a given source.
While that is one way to go about it, we don’t think it’s the best way as it doesn’t deliver on SI’s true potential. It’s like buying a stock that has already experienced a big run-up in its price without considering whether there is more room to run.
A better way is to look for companies that are actively seeking to improve their sustainability practices.
Why? Because those are the companies that are more likely to create shareholder value by reducing ESG-related risks and pursuing sustainability-related opportunities. This is best-in-progress investing in the sustainability space, and we believe it can offer ESG-related alpha – what we call "alpha plus” – superior investment performance attributable to sustainability-minded business practices.
The continued trend of the democratization of private assets will also likely lead to additional impact investment products being made available for both institutional and retail investors.
TA: While the institutional investors are committed to, and are investing in, ESG-compliant products, how long do you think it will be before retail and mass affluent investors can buy into the same products? And won’t that move make the biggest difference?
SBH: The SI space is evolving at a rapid pace. We are likely to continue to innovate in terms of products as well as availability to retail investors. However, the products must deliver on financial performance as well as sustainable outcomes. Our annual impact investing survey continues to indicate that there is little appetite from investors to sacrifice returns or pay higher fees to invest sustainability.
TA: What do you see as the next strong impact investment theme? Is investment in biodiversity – a matter of importance in Asia – going to grow?
SBH: While the issue of biodiversity is likely to grow. I believe you are going to continue to see technological advancement – in terms of both a risk and opportunity – rise up the agenda of the sustainable investor.
TA: In terms of risk, as the world becomes more and more connected, how are investments exposed to cyber risk, technological displacement (worker retraining for the new economy), misinformation and biases?
SBH: We believe that generative AI will create significant investment opportunities via the providers, supply chain and transformative efficiencies. It has the potential to provide business.
We also believe the conversation around climate change is likely to broaden out from its current carbon tunnel vision to an enhanced focus on physical risk. In 2022, physical damage due to increasing climate change, according to Gallagher Reinsurance, resulted in a direct economic cost of US$360 billion.
TA: Could Asia’s transition be boosted or helped to get ahead of the rest of the world by the huge generational transfer of wealth in this region, or is this a global trend?
SBH: We believe that we are likely to see two wealth shifts: both a gender and then a generational wealth shift. This is a global trend that we believe will continue to provide tailwinds to SI as our American Century Impact Investing Survey indicates that younger generations are much more focused on sustainability.
Although Asia often gets painted in the headlines in a negative light due to its emissions profile, it is important to highlight how it is driving the transition with China, India and Japan in the global top 10 for installed renewable energy capacity.
