Asset owners in the Asia-Pacific are increasingly addressing climate risk in their portfolios. Three-fifths of asset owners evaluate carbon emissions of their investee companies, and slightly less than half plan to make investments in climate-transition-related sectors, Cerulli Associates says in its latest report.

Some 69% of asset owners would like external asset managers to divest from high carbon-emission sectors, while half of the Asia ex-Japan managers plan to divest from such sectors.

The process of decarbonization is a challenge. While 56% of asset owners would prefer to engage with the companies, 41% believe divestments could negatively impact their returns, and about 46% cite the shrinking investment universe as the reason for not eliminating fossil-fuel companies from portfolios.

However, it might not be easy to decarbonize investment portfolios. For instance, complexities in assessing data and risks across different asset classes, and lack of standardized data sets are among the top challenges in evaluating companies for climate risks, Cerulli says, citing the findings of its survey of asset owners and asset managers.

"Addressing climate risks is complex – the most sophisticated asset owners will rely on managers to learn about technical details of carbon data measurements, types of assets to be assessed, and types of emissions to be included, among others," Cerulli associate director Leena Dagade says.

"While some asset owners have committed to net-zero emission targets, given the novelty of the topic and technical details of measuring climate risk, various segments of the industry will need to join forces to share knowledge and come up with collective actions in order to reach their climate goals," she adds.

On a positive note, the transition to renewable energy and green pledges by governments are expected to bring opportunities in a range of sectors, and managers’ expertise will be needed to identify the right investments and tap multi-year opportunities. Managers are poised to innovate – 89% have plans to offer more climate-focused investment products to their clients, according to Cerulli’s survey of Asia ex-Japan managers.

“While asset owners in the region are beefing up their environmental, social, and governance (ESG) capabilities, 70% of them rely on the expertise of external managers as they seek to acquire technical know-how about ESG investing,” Cerulli analyst Kean Yung Siau says. 

The key areas where asset owners expect reporting from managers are security-level ESG scores (52%), portfolio-level exposure to climate risks (46%), security-level exposure to climate risks (41%), and portfolio-level exposure to other financially material ESG risks (41%).

Cerulli believes managers with established practices and expertise in analyzing and assessing climate-related data have opportunities to work with asset owners.