ESG investing: An emerging ‘megatrend’
Sustainability is an investing trend to watch in 2019
Environmental, social and governance or ESG is a global ‘megatrend’ that will define the future of investing in the region, say finance experts.
“ESG is going to be a megatrend. No global asset manager can afford to neglect this trend,” says Sharon Tan, head of client service and implementation for Asia Pacific at DWS Group.
“We see a future where every client will view ESG as a core element of their portfolios,” says Tan at the recent 13th Asian Bond Markets Summit in Singapore.
Tan’s view is consistent with recent findings by Asset Benchmark Research citing 47% of local currency fixed income investors are incorporating ESG factors in their portfolio decisions compared to just a third of respondents that did in 2017.
Tan cites two main drivers for ESG investing: “One is the ethical concern and the other is ESG opportunities and risks”. She notes that ESG factors can’t be ignored particularly for investments in countries with issues around sustainability.
For now, Asia accounts for a small portion of assets in sustainability. But that space is growing rapidly, says Tan.
Out of the US$23 trillion in ESG assets globally, Europe accounts for 53%, followed by the US with 38%. Asia-Pacific region represents just 4% of the assets, but is exhibiting the most expansion, she adds.
“The growth of Japan alone over recent years was 6,690%,” says Tan, citing the country’s ESG-related assets over the period of 2014 to 2016.
DWS worked with Apple Inc on the launch of a US$300 million China Clean Energy Fund in July.
Apple along with 10 suppliers are investing in the fund that will finance renewable energy projects in China.
“Issues such as climate change are becoming more and more in focus and topical, especially on the retail side,” says Rahim Khawaja, senior vice president, global structured finance, investment banking department, Asia at Sumitomo Mitsui Banking Corporation. There is growing demand for green bonds even among retail investors, he adds.
The total issuance of green bonds globally during the first three quarters of 2018 reached US$109.6 billion. “The green bond market grew from a small base very quickly,” says Khawaja, noting that the overall market momentum for green bond issuance will remain strong.
“The overall market and (ESG) themes are quite promising,” he notes. “Chinese policy banks’ bond issuance and corporate issuance have grown quite a bit recently because of the rising awareness of ESG,” he adds.
One of trends in the green bond market is the sustainability bond where proceeds are used for funding both green and social projects.
“Last year we structured a Women’s Livelihood Bond with DBS. We originated a pool of loans to organizations throughout Southeast Asia that have positive impact in terms of empowering women,” says Robert Kraybill, managing director at Impact Investment Exchange (IIX). “The core focus of the bond is not about green or clean energy, but relates to social impact,” he adds.
IIX sold the bonds to private banking clients through DBS private banking network and also to some institutional clients in Europe and the US, says Kraybill.
In the green bond space China, India and Indonesia are the markets to watch. But Khawaja insists that there are opportunities beyond these markets. He notes that Asia has a younger crop of investors that are showing strong interest in ESG-related issues.
“From a regulatory and policy perspective, we have seen a lot of strong statements from the very top of the Asian governments regarding climate change and other aspects of ESG,” he adds.
Delvin Chong, senior vice president of treasury and capital markets at Cagamas echoes this view.
“The stock exchange in Malaysia launched the ESG index in 2014. The Securities Commission Malaysia also launched the SRI (sustainable and responsible investment) for sukuk framework and the guideline on fund management in 2014 and 2017, respectively,” he adds.