Asia catches the sustainable investment bug … at last
The region is late to the party, but with much ground to catch up on and demand from both governments and investors, there's ample room for growth
In the aftermath of Donald Trump’s decision to pull the US out of the Paris Climate Accord at the beginning of this month, Asia’s political leaders were quick to commit themselves to meeting their targets under the landmark treaty. Maybe it’s time for Asian investors to join the sustainability party too?
Globally, funds with socially responsible mandates accounted for more than a quarter of the assets under management at the beginning of last year, or U$22.9 trillion. That followed an explosive 25.2% jump from 2014, according to the Global Sustainable Investment Review 2016.
Asia ex-Japan has been a latecomer to the trend, accounting for just 0.2% of global socially responsible investment (SRI) assets. SRI assets in the region still increased 15.7% from 2014 though and investors are counting on a lot more to come.
“Asian investors are only really just waking up to the opportunities,” said David Li, a director at Impax Asset Management. “The rate of growth is likely to pick up even more with government announcements and implementation of new and ever more rigorous environmental policies and regulations, development of new forms of funding and significantly increased private sector participation.”
Home to the world’s largest emerging markets, Asia has achieved remarkable economic advancement in short order, but now faces critical environmental and societal challenges that threaten to undo its progress.
The World Bank earlier this year warned future growth depends on public investment in education and health care, and on addressing environmental issues like water management, deforestation and air pollution.
India took action in March, extending the status of “legal persons” to the Ganges and Yamuna Rivers, as well as their tributaries and the Himalayan glaciers that feed them, to help ensure their preservation.
The two rivers are sacred for Hindu worshippers, but suffer from severe pollution due to the large population that lives in close proximity.
China has also taken public steps to clean up the environment. The country’s Law on Environmental Protection produced 6.6 billion yuan in fines last year, 56% more than in 2015, according to local reports. Another mandate, the Environment Protection Tax Law, is set to come into effect in 2018 and will fine offenders that directly emit specified pollutants.
The increased regulations come as this region also takes a larger role in developing the global market for green bonds, a type of debt issuance that raises capital for sustainable development projects.
“Two years ago, most green bond issuance was coming from Europe, from multilateral development banks, now we are seeing China, and Asia more broadly, stepping up to the challenge,” said Zoe Knight, head of the Climate Change Centre of Excellence for HSBC.
China entities combined to issue 238 billion yuan worth of green bonds in 2016, representing 39% of the global total, according to Climate Bonds Initiative. Categories endorsed for green bond issuance by government authorities include pollution prevention and control, energy saving and clean transportation.
The environmental and societal challenges impacting the region have also created opportunities for companies to fill the gap and deliver sustainable solutions.
The Impax Asian Environmental Markets (Ireland) Fund invests in companies with greater than 20% of underlying revenue generated through the sale of environmental products or services in specified areas of sustainability. It has gained a cumulative 86.2% in five years through May, beating a custom benchmark comprised of MSCI AC Asia Pacific ex-Japan and MSCI Japan that returned 80.9% during that time.
Another fund, the Stewart Investors Asia Pacific Sustainability Fund targets companies poised to benefit from sustainable development in their operating markets.
The fund size is £430.7 million and it has increased a cumulative 107.4% in five years through April. Its largest holdings include snack maker Vitasoy International, consumer products company Marico Ltd, and water and wastewater services provider Manila Water Co.
Private equity funds in the region have also capitalized on opportunities to make sustainable investments. Armstrong Asset Management raised US$164 million in 2013 for a clean energy fund focused on Southeast Asia. In 2015, Equis Funds Group announced it raised US$1.7 billion in capital for energy and infrastructure investments that included solar generation projects in Japan.
Sustainable investment has also become a primary consideration for individual investors as they build their own portfolios. A Lombard Odier survey of Asia-based high-net-worth individual and ultra-high-net-worth individual investors last October revealed 97.2% of respondents were willing to add to allocations in impact investing.
“We do see the interest from our Asian clients quickly growing, in particular, for impact themes related to climate change, resource depletion and pollution, challenges that are often very directly observed by clients in the region,” said Bertrand Gacon, head of Impact Office at Lombard Odier.
“As a result, the role and relevance of impact investing to solve these issues is becoming a common topic for discussion.”