Institutional investors are undoubtedly making strides incorporating environmental, social and governance factors (ESG) in their investment decision-making process. Many now have a clearer appreciation how challenges surrounding climate change, workplace diversity and social responsibility can impact risks and drive returns. Across Asia, pension, insurance and sovereign wealth funds are following in the footsteps of their counterparts in the West in driving sustainable investing. Japan’s Government Pension Investment Fund (GPIF), for example, has publicly committed to integrate ESG factors into its investing. GPIF, the world’s largest pension fund, also joined as a signatory to the UN supported Principles of Responsible Investment (PRI) along with over 1,500 other signatories.
One interesting development is that ESG factors are increasingly forming part of credit risk assessments in Asia, a move pushed forward by the trend towards sustainable investing. It is the Paris Agreement, or COP21, signed in December 2015, which underpins the urge to act quickly on a global scale. Its long-term goal is to keep the increase in global average temperature to well below 2 °C above pre-industrial levels. However, achieving this target will require substantial reductions in greenhouse gas emissions by many nations, and some countries are performing better than others in this undertaking.
China, the world’s biggest emitter of greenhouse gases, is becoming increasingly recognised as taking its commitment to sustainability very seriously and has made corporate ESG reporting mandatory. Hong Kong and Singapore followed suit and unveiled a similar policy. In addition, China is pushing for policies supporting green bonds and is among the world’s most active issuers.
Investors have made deep strides in ESG, but it is also clear that many of them struggle with sustainable investing. In truth, ESG strategies get but a fraction of the total capital dedicated to pension funds globally. Moreover, some investors still have a tendency to treat ESG as a passing investment fad rather than an integral part of their investing strategy. ESG initiatives are commonplace in corporates, but these policies are often held at arm’s length from core investment activities. With most funds, ESG integration has failed to go to asset classes beyond the usual sustainable-equities strategies.
But change is in the air. Issuers and investors are increasingly aware that not only will adoption of ESG standards have considerable implications for running a sustainable business, but also these standards are likely to become mainstream in the coming years, as demanded by their constituents. In short, ESG is the new market paradigm.
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