ESG investments surged in Asia-Pacific in 2020 as sustainable investing takes off, MSCI survey finds

Chinese tourists wear masks as protection from the pollution outside the Forbidden City during a day of high pollution in Beijing, China.

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Sustainable investing is taking off in Asia-Pacific as institutional investors accelerated their environmental, social and governance (ESG) investments during the coronavirus pandemic last year.

ESG investing prioritizes a company’s positive contributions to its community, the environment, and social impact. Rating companies along ESG metrics allows socially conscious investors to screen potential investments to fit with their investment goals and values.

The global pandemic has raised the importance of ESG issues among investors highlighting how catastrophic events such as climate change would impact investment returns.

Around 79% of investors in Asia-Pacific increased ESG investments “significantly” or “moderately” in response to Covid-19, according to a recent MSCI 2021 Global Institutional Investor survey.

That is a slightly larger share than the 77% of investors globally who upped sustainable investments during the period. Overall, the figure rose to 90% for the largest institutions, or those with over $200 billion of assets, the survey found.

Meanwhile, 57% of Asia-Pacific investors expect to have “completely” or “to a large extent” incorporated ESG issues into their investment analysis and decision-making processes by the end of 2021.

“Once an issue for ‘green funds’ and side-pockets, ESG and climate are now firmly established as high priority issues,” Baer Pettit, MSCI president and chief operating officer, said in the report. “2020 marked a profound shift in the way institutions invest as many investors have recognized that many companies with strong environmental, social and governance practices outperformed during the pandemic.”

MSCI, a leading index provider, surveyed around 200 sovereign wealth funds, insurers, endowments, foundations and pension funds with combined assets under management of $18 trillion. About 70 of the institutions were from Asia-Pacific.

“ESG analysis and integration is increasingly becoming mainstream in APAC, and the rate of adoption has increased during the pandemic,” Gabriel Wilson-Otto, global head of sustainability research at French bank BNP Paribas, said in an email interview.

This is mainly because Covid-19 has put “a spotlight on corporate behaviour, business resilience and broader sustainability issues,” he noted. 

“The human cost of the pandemic highlighted the importance of robust health care systems, treatment of employees and contributed to record issuance of social bonds in 2020 as investors sought to direct capital towards solutions,” pointed out Wilson-Otto.  

He added a key driver is the growth in “values-based” investing in thematic and ESG-integrated investment products, aided by a generational shift. A second related driver is the increasingly favorable economics of investing in the energy transition and other sustainability solutions. 

“As a result, there has been a shift in focus from ‘ESG integration may hurt returns’, towards a growing recognition that sustainable business practices can be aligned with business resilience,” said Wilson-Otto.

Climate change impact

In particular, some Asia-Pacific countries are among those leading the way on climate change-related considerations.

Around 50% of investors in Asia-Pacific countries, excluding Australia, New Zealand and Japan, consider climate change metrics for decision-making compared with the global average of 42%, the MSCI report showed.

“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,” Pettit said in the report. “These trends are amplified by technology innovation, adding significant cost and time pressure. Quite simply, investing has never been a more complex ecosystem.”

Despite starting from a position of higher carbon emissions, there is a growing awareness of climate change-related issues across Asia-Pacific and rising ambition to address its impact, said Wilson-Otto.

“The raft of ‘net zero’ emission targets announced by countries in Asia-Pacific towards the end of 2021, highlight how quickly the policy landscape can change,” he added. This is further amplified by the “strong growth in incorporating ESG analysis into investment decisions in both China and India,” he noted.

China remains the world’s largest greenhouse gas emitter, responsible for 28% of global emissions – more than the U.S. and European Union combined.

But in a surprise move, Chinese President Xi Jinping in the United Nations General Assembly last year pledged the country will become carbon neutral by 2060. This was quickly followed by similar commitments from Japan and South Korea.

“The step up in government focus on addressing environmental challenges in China over the last 10 years has been a direct driver of environmental issues becoming financial issues for many issuers,” said Wilson-Otto.

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