2022 has been a difficult year for ESG in Asia as investor interest in the asset class has started to wane in part due to its correlation to growth stocks, which have been hammered over the past 12 months.
Here, Ecaterina Bigos, CIO of core investments in Asia ex-Japan at Axa Investment Managers, talks about how stakeholders are taking that in their stride, soaring green bond volumes across the region, how disclosure standards continue to evolve and what Axa IM is doing to align its portfolio with its net-zero commitments.
How has ESG activity in Asia been impacted by the broader market sell-off?
The temporary market sell-off is potentially a hinderance, but it doesn’t derail the ESG journey that everyone has embarked upon. If you look at ESG and sustainable practices, they’ve certainly rapidly moved from a niche area a decade ago to becoming mainstream.
We see increasing and directed actions from regulators and governments in Asia, and globally, to change economies, shift policy and direct investor attention in accelerating sustainable transition plans.
At the corporate level, business leaders are leaning into sustainable practices, fuelling change through innovation, creating competitive advantages and certainly boosting returns. Also, companies are increasingly enjoying the halo effect from aligning capital with environmental and social challenges.
Finally, from an investor perspective, we are certainly recognising the importance of sustainable investment practices not only in generating returns but also sheltering investments from event risks and more importantly having a long-term and lasting impact on society.
How does Asia compare to other regions when it comes to the trajectory of ESG?
Everybody refers to ESG broadly, but we need to break it down into environmental, social and governance factors. These are three distinct pillars, and the risks and opportunities can vary by industry and geography as well. I will focus primarily on climate, which is certainly one of the most advanced and visible issues pressing on society.
In terms of singling out one particular element, I would say green bonds have emerged as a unique, transparent and responsible investment opportunity, not just in Asia but globally. As of December 2021, there were about 1,600 green bonds in China and the total balance was about $270bn, which makes China the second largest green bond market globally. The three-year compound annual growth rate was around 37.8%, according to MSCI.
China is making a lot of effort to align their green bond policies with international ones. That visibility and transparency in assessing green bonds is increasing in China, which is a positive and certainly an opportunity not just for Asian investors but global investors as well and China green bonds have delivered a competitive performance in recent years.
If you take the Asean six – Vietnam, Thailand, Singapore, Indonesia, Malaysia and the Philippines – the sustainable debt market set an annual issuance record for green, social and sustainability bonds and loans at $54bn in 2021, according to the Climate Bonds Initiative. It’s not the same growth we’re seeing in China obviously but in broad Asia you see an ambition and scope for them to become world leaders for responsible investing and the transition towards a greener world.
How have the disclosure standards in Asia evolved over the last few years?
Evolution is probably the right word to use. In terms of the depth, frequency, consistency and quality of information reported in Asia, it’s still evolving. Language barriers are certainly one element that data providers are highlighting as a challenge when they look to get information from corporate statements and media coverage to assess their responsible journey. That language barrier is certainly one thing that is different compared with the developed world generally.
In Hong Kong, we’ve had the SFC [Securities and Futures Commission] publish rules on ESG product labelling. It basically provided guidance around sustainable finance disclosure regulations so aligning the use of funds to comply with SFC regulations classified as Article 8 and 9.
If we look at Asean, most of the sustainable frameworks were put in place in 2021 and, in fact, in 2021 there was a joint statement from the seventh Asean ministers and central bank governors’ meeting where they announced a new initiative to develop the Asean taxonomy for sustainable finance. These are big moves from Asia and efforts to provide more transparency and consistency with the global standards.
How has Axa IM been helping with the drive towards net zero?
I will just outline a few commitments we made in that transition and how we manage our assets. 65% of our AUM in 2022 is committed to be managed in line with net zero by 2050. That’s an increase of 15% from 2021 so big progress.
Net-zero alignment doesn’t mean that companies have already successfully neutralised their carbon emissions but it will encourage companies to put frameworks in place to get them through that journey of achieving net zero emissions. In terms of the Axa portfolio, we are aiming for the portfolio to be net-zero aligned by 2040 so holdings that are not net-zero aligned by then will be divested.
We are also driving change through engagement with companies and clients. In 2021, we conducted about 283 engagements with 245 entities globally, of which climate change, corporate governance and human capital were a large part of it, and across Asia we had active engagement in Indonesia, Malaysia, Hong Kong and China.
Last, but not least, we are part of the Net Zero Asset Managers initiative, which is about 236 participants. We also actively publish various bits of research. We have a platform, which is called the Axa IM Investment Institute, which has a section specifically dedicated to this issue.
This story first appeared on our sister publication, ESG Clarity.