Demand for sustainable investments has grown rapidly in Asia-Pacific during the past three years, and will continue to expand further, concluded a survey of 161 investors in Australia, New Zealand, Japan, Hong Kong and Singapore.
The report by the Economist Intelligence Unit (EIU), called “Financing sustainability: Asia-Pacific embraces the ESG challenge”, found that 68% of investors intend to increase their allocations to sustainable finance over the next year, and that 27% of survey respondents expect to have 25% to 50% of their AUM in sustainable investments in three years time.
It defined sustainable financial instruments as green bonds/loans, social bonds/loans, sustainability bonds/loans, sustainability-linked bonds/loans and green deposits. Sustainability and green bonds are the most popular category, although products such as sustainability-linked loans and green deposits are gaining popularity.
Sustainable finance instruments and their uses and objectives
Source: EIU
Portfolio diversification is the main motivation for investors’ allocations to sustainable finance, followed by investing for “sustainability or impact outcomes” and enhanced financial returns.
In fact, 68% of Asia-Pacific investors surveyed said that their sustainable investments performed better than their traditional equivalents, with as much as 80% of Singapore respondents saying they outperformed, and all of them “firmly debunked the notion that there is no financial benefit to sustainable investing,” according to the report.
Furthermore, around 70% in the region agreed that sustainable investments had a greater positive impact on their organisation’s reputation than traditional investments.
The report’s conclusions both conflicts with some regional surveys and reinforces recent trends.
For instance, a survey of licensed asset managers by Hong Kong’s Securities and Futures Commission (SFC) found that only 35% of 660 firms consistently integrated ESG factors in their investment and risk management processes. Also, a Morningstar report last year noted that ESG investment in Asia significantly lagged other regions, while “greenwashing” or providing misleading ESG claims was rife.
On the other hand, global and local money managers in Asia have been responding to increasing demand for ESG products.
For example, UBS WM recently revealed that it had attracted $1bn from Asia-based investors to its sustainable cross-asset portfolio, while asset managers including Blackrock, Fidelity and Goldman Sachs have launched ESG-themed funds in Hong Kong and Singapore, with the pace of launches picking up in the last six months.
At the end of 2019, there were around 30 SFC-authorised funds with a green or ESG focus, according to the regulator’s website.
Obstacles to growth
However, the EIU report also found that fundamental market challenges around the supply of suitable securities will hinder the market’s development in the short- to medium-term, as companies struggle to determine the qualifying criteria for green or other sustainable assets.
Only 7.4% of Asia-Pacific based issuers (and 17.5 % of 154 global issuers) surveyed have used sustainable financing for business projects primarily for that reason, yet greater clarity would likely lead to more issuance.
In fact, as much 85% of all issuers agreed that they see greater demand for sustainable financing compared to other forms of finance, but they need more clarity and harmonisation of criteria and processes.
“Despite the strong demand, issuances have not yet caught up, mainly because companies are unsure of what constitutes a sustainable asset or are put off by the up-front work required for such issuances,” noted Georgia McCafferty, editor of the report.
Regional investors naturally want assurances from issuers that the funds provided are being used for sustainable purpose.
The largest portion (25%) need verification of the issuer’s use of proceeds after investment, and just over one-fifth insist on the additional step of seeking certification from the Climate Bonds Initiative (CBI) — a not-for-profit which provides sector-specific eligibility criteria for green assets and projects — or another independent opinion on the sustainable credentials of the project being financed.
There is also a difference among surveyed countries as to the preferred forms of review: Singapore investors choose verification after issuance as their first option, while more in Australia/New Zealand prefer CBI certification.
Regional governments and regulators can help create a clearer and more harmonised environment for both issuers and investors, concluded the EIU report.
Regulatory state-of-play
Separately, the Asia Securities Industry and Financial Markets Association (Asifma) this week published a paper assessing the current regulatory landscape for sustainable and ESG finance in the region.
It noted that the Hong Kong Quality Assurance Agency, established by the Hong Kong government, has operated a Green Finance Certification Scheme since 2016. The scheme provides third-party conformity assessments for green finance issuers and incorporates a variety of certification standards, including the green bond principles and the clean development mechanism under the UN Framework Convention on Climate Change.
Asifma also highlighted the SFC’s strategic framework for green finance announced in September 2018, whose action-items included enhancing disclosure by listed companies of environmental information (in particular climate-related disclosure) and conducting a survey of asset managers and asset owners on their sustainable investment practices.
The Hong Kong Stock Exchange responded to the first of these SFC’s initiatives in December 2019 by insisting that listed companies include a statement from the company board setting out its consideration of ESG issues.
As for the second action item, the SFC published a circular in April 2019 to provide guidance to management companies of SFC-authorised funds with an ESG investment focus. It released the results of its survey of asset managers in December 2019, indicating that it plans to develop standards and provide practical guidance on the management of climate change risks in asset management.
In addition, the Hong Kong Monetary Authority in May 2019 announced three measures to support green finance development, including developing a common framework to assess the “greeness” of banks, giving priority in its Exchange Fund to green and ESG investments if the long-term return is comparable to other investments on a risk-adjusted basis, and setting up a Centre for Green Finance to serve as a platform for technical support and experience sharing for the green development of the banking and finance industry.
Singapore turns green
Meanwhile, the Singapore Stewardship Principles for Responsible Investors were launched in 2016, and the Singapore Exchange implemented a “comply or explain” regime for sustainability reporting in 2018, where listed companies are required to disclose and explain their sustainability practices.
Singapore has also taken steps to nurture the growth of the green bond market, according to Asifma.
The Monetary Authority of Singapore (MAS) introduced the Green Bond Grant scheme in 2017 to encourage the issuance of green bonds, and two years later MAS included social and sustainability bonds, and renamed the scheme as “Sustainable Bond Grant Scheme”. In order to take advantage of the scheme, proceeds of bonds issued by qualified issuers must be used to fund projects that deliver environmental and social benefits.
Among other recent initiatives, in November 2019, MAS announced that it had set up a $2bn green investments programme to invest in public market investment strategies that have a strong green focus. It would place funds with asset managers who are committed to drive regional green efforts from Singapore.
Subsequently, MAS has co-drafted a set of environment risk management guidelines with the Investment Management Association of Singapore to provide guidance to asset managers on sound environmental risk management practices for funds and segregated mandates. The guidelines will be issued in the first quarter of this year for public consultation.
