The survey of sovereign wealth funds, insurers, endowments/foundations and pension funds found that 79% of investors in Asia-Pacific (and 77% of investors globally) increased ESG investments “significantly” or “moderately” in response to Covid-19, with this figure rising to 90% for the largest institutions (over $200bn of assets).
Fifty-seven percent of Apac investors expect to have “completely” or “to a large extent” incorporated ESG issues into their investment analysis and decision-processes by the end of 2021.
Moreover, half of Apac investors include climate issues into their decision-making processes, and climate change was named one of the top three trends — after increasing regulations and market volatility — that will affect the way they will invest over the next three-to-five years.
“The combination of climate-related events, such as devastating wildfires, floods and droughts, and a global pandemic have accelerated the paradigm shift on ESG and climate change. Once an issue for ‘green funds’ and side-pockets, ESG and climate are now firmly established as high priority issues,” said Baer Pettit, MSCI’s president and chief operating officer, in a statement.
With climate change cited as one of the major challenges, Apac countries are among those leading the way on consideration of climate change metrics, with 56% of New Zealand investors and 50% of Apac ex-Australia investors factoring such data compared with 42% globally. Japan falls in line with the global average at 42%, but Australia lags with only 24% of investors analysing such metrics.
Other recent reports, however, emphasise that Asia-based asset managers continue to lag behind their European peers for adopting responsible or sustainable investing practices.
For instance, Asian asset managers fulfil just 43% (compared with 72% of European firms) of the WWF’s sustainable investment criteria, suggesting their portfolios may be at greater risk from climate change and natural capital loss.
GLOBAL TRENDS
Although the MSCI survey revealed global differences, for many investors throughout the world, ESG challenges are a major concern.
Almost a third (31%) of institutional investors with over $200bn of assets said climate risk will have the greatest impact on the way the organisation invests over the next three to five years. This was followed by disruptive technologies, such as artificial intelligence for a fifth (19%) of investors, while 14% believe increasing sophistication of ESG measurement will have the greatest impact.
On the other hand, smaller investors (less than $25bn of assets) said increasing regulations and market volatility are the major trends that will impact their investments over the next three to five years.
“The largest firms have the resources to lead the industry on major issues [such as] ESG. Smaller ones are under pressure to keep up,” noted the report.
Globally, larger investors are already increasing their focus on accessing and monitoring the latest climate data. Around half of the investors surveyed with more than $200bn of assets said they are regularly using climate data to manage risk, and they four times as likely to regularly use climate data to identify investment opportunities than those with less than $25bn, according to the survey.
“[Last year] marks a profound shift in the way institutions invest as many investors have recognised that companies with strong governance, environmental and social practices have outperformed during the pandemic,” said Pettit.
As a result of the range of global challenges institutions are facing, the report found that respondents perceived risk as more important than traditional asset allocation, with investors of all sizes believing the diversity of risk sources was more relevant than asset allocation in achieving investment excellence.
“The reality is, climate change links to a rapidly shifting social context that in turn drives changes to investor demands, all within a very dynamic regulatory environment. These trends are amplified by technology innovation, adding significant cost and time pressure, said Pettit.
