“Asian investors understand environmental issues as well as anyone else in the world,” Fabian told FSA.
Nevertheless, “the traditional social responsibility framework that the Europeans might have used as an entry point in this discussion won’t work in parts of Asia.
“Investors in Asia won’t have to make a conscious decision to be responsible investors,” he said. The pathway will be much more pragmatic.
Europeans invest largely based on the prevention of future issues, an approach that does not necessarily aim to maximise investor profit.
In Asia, the profit motive is intertwined with ESG investing, and that will help to pull in investors, Fabian said. The regional companies that are increasingly viewed as attractive opportunities are those that are growing by tackling the region’s comparatively urgent environmental problems.
China as the driver
Fabian said it has become obvious to the Chinese government that economic development is linked to environmental issues. Last year, China’s central bank said that it wanted a transition to a low-carbon energy infrastructure financed 85% from private sources. It also published guidelines for establishing a “green financial system”.
“The Chinese leadership has clearly decided that there’s more economic return for them being in clean energy,” said Fabian. They have actively sought PRI guidance, inviting the organisation to speak to government officials and the investment industry on considering ESG issues, he added.
“It is very clear that they’ve set the direction and it’s different from the hand-wringing that is going on in some other markets [such as the US],” he added.
Green bond shortage
The ESG-related opportunities lie predominantly in energy transition, agriculture, infrastructure and real estate, according to Fabian.
Specific products include green bonds, whose issuance has grown dramatically over the last three years, to reach $20bn so far this year. Amundi and the IFC this month announced the creation of the world’s largest green bond, FSA reported earlier.
Nonethless, Fabian said there’s a shortage of the products.
“There’s way more demand in the institutional market than there are green bonds coming onto the market.”
Other products include pooled investment funds, with some form of government-supported risk mitigation as well as thematic investment funds.
Investors in green bonds have to remain cautious, however. “Some investors may look at the label without looking at the underlying pool of the assets,” said Fabian. “That’s generally an imprudent thing to do.”
In the rush to market, not all issuers use the same criteria for what qualifies as “green”. Developing clear standards for labeling is one of the PRI’s priorities, he said.
Too many consultants
The financial industry’s biggest challenge in following through on its good intentions is its own structure.
“The investment chain from beneficiaries to owners to managers with all the consultants down to the companies is so long, and there are so many advisors and intermediaries in the process, that some of the ESG issues and desire to act on them get very diffused,” said Fabian.
To address this, the PRI is analysing the ecosystem of asset consultants, beneficiary relationships, governmental regulations, incentives structures, disclosure and reporting obligations as well as the flow of data through the investment chain, he added.
Based in London, the PRI is not associated with any government, according to the organisation. It is supported by, but not part of, the United Nations. PRI’s mission is to help investors integrate ESG issues into their investment process.
