INVESTMENT strategies that take into consideration environmental, social and governance (ESG) factors are becoming one of the mainstreams of asset management. Yet Asia lags seriously behind, with most of the leg-work taking place in Japan.

Asia’s total ESG assets under professional management stand at US$500 billion, while globally the number is US$23 trillion, according to Mary Leung, CFA’s head of advocacy for Asia-Pacific. “Asia’s number can be even less if you strip out Japan,” she adds, noting that 90% of APAC ESG assets come from Japan.

In 2016, US$473.6 billion of funds were managed with responsible investment strategies in Japan, according to a report by Global Sustainable Investment Alliance.

Japan was the country in Asia to put ESG on their map. In 2015, the world’s largest pension fund, Japan’s Government Pension Investment Fund (GPIF), became a signatory to the United Nation’s Principles for Responsible Investment (PRI). Supported by UN, the PRI encourage investors to use responsible investment to enhance returns and better manage risks. This network has so far attracted more than 1,857 signatories ranging from asset owners to investment managers and service providers.

“That was largely seen as the tipping point,” says Leung. In June this year, with US$1.3 trillion under management, GPIF plans to raise its allocation to ESG investments to 10% of its stock holdings, up from 3%.

Even before the GPIF signed up to PRI, Japan had a strong political will to modernize and improve corporate governance. “Japanese Prime Minister Abe’s cabinet initiated reforms in Japan’s corporate governance landscape, promoting more transparency and accountability,” says Leung.

In February 2014, a group organized by the Japan’s Financial Services Agency published a document which is known as Japan's Stewardship Code. The document aims to get the country's institutional investors more involved with the companies that they invest in and fulfill their fiduciary responsibilities, promoting the sustainable growth of Japanese corporates.

ESG matters

Despite the strong contribution from Japan, Asia is still lagging. In Asia ex-Japan, US$52.1 billion of funds were managed with responsible investment strategies in 2016, according to the Global Sustainable Investment Alliance report. Hong Kong’s underperformance is particularly obvious in the region.

Seven percent of Hong Kong institutional investors increased their sustainable investment over the past five years compared to 33% in Asia and 48% globally, according to a recent report by Schroders.

Client demand is one of the main drivers of ESG. However, in Hong Kong, ESG has not yet gone mainstream. “ESG in Hong Kong is still in a very nascent stage. People are thinking about it. Actions have yet to follow,” says Leung, noting that this is one of the reasons for Hong Kong’s lack of ESG engagement.

But there are signs that Hong Kong is focusing more on ESG. Since this year, it has become a mandate for listed companies to make ESG disclosures on measurable key performance indicators, which include targets and achievements, according to HKEX. The bourse also requires that companies failing to adhere to the rules need to give explanations.

Leung points out that the lack of ESG investing may be a silver lining for some investors: “This indicates huge opportunities out there for investors and market practitioners. Not many people are doing it right now in this part of the world. It may actually be easier for good managers to outperform because the market space is not yet crowded.”

China also lags behind in ESG, although China has been keen on green bonds in recent years, and has now become the single largest market for green bonds. But eco-friendly as it may sound, the Chinese government allows coal-related projects that reduce carbon emissions to be labeled “green”.

“The use of proceeds from a green bond issuance has to go towards green projects such as renewable energy and waste treatment,” says Leung, referring to the international standard. “Yet in China, if you spend money on a clean coal project, it will still be considered as green,” she adds, highlighting this as one of the major concerns.

However, Chinese asset owners, especially billionaires, are taking their social responsibilities more seriously. “In the past, Chinese billionaires were more concerned about financial return,” says Amy Lo, the chairman and head of Greater China for UBS Wealth Management, “but now they are thinking about contributing back to the society. A lot of the mainland Chinese billionaires want to contribute back to the community where they came from.”

In general, Leung takes a positive attitude towards the outlook of Asian ESG. “I think that Asia is picking up,” she says. “The evolution is happening and we are slowly getting there.”