Rachel is an investment writer in our Glasgow office.More articles from Rachel Barrack
- New York
Asia might not be the first place that springs to mind when you think about sustainability. Air pollution, deforestation and a growing problem with plastics may be closer to your initial association.
But with Asia set to dominate the global economy – with a growing middle class and subsequent rise in purchasing power – the continent will play a huge role in setting the tone for responsible development. In this post, we explore how Asia is tackling environmental issues and what impact the coronavirus pandemic could have on sustainable investing in the region.
467 million. 1 billion. 100 billion.
These numbers represent the real cost – in acres burned, animals lost and dollars that will need to be spent – of the Australian bushfires. What came to be known as ‘Black Summer’ shook the world at the end of last year, highlighting the very real impact of climate change, and the insidious effects of the extreme heat and drought it produces.
And as the fires continued to burn through early 2020, it seemed clear back then that Australia’s costliest natural disaster would be the year’s biggest tragedy.
Then the world was struck down by the coronavirus epidemic – the economic, social and human cost of which looks set to dwarf that of the bushfires.
But far from completely shifting the focus from climate to contagion, if anything, the coronavirus has highlighted the need to continue posing wider questions about public health and the environment, and to look more closely at the sustainability of global business models.
Indeed, from an environmental, social and governance (ESG) perspective, there have been certain positives. ESG funds globally saw US$45.6 billion of inflows in the first quarter of 2020, compared to US$384.7 billion of outflows for the overall fund universe.
Moreover, even as global energy markets face unprecedented turmoil, renewables are weathering the storm, with the industry projected to be the only area of the wider energy sector to grow in 2020.
The lockdowns in place across the world have also precipitated a marked drop in pollution levels, with the smog in cities like Delhi now replaced with a blue skyline. Experts have certainly been raising concerns about the hazardous effects of poor air quality in Asia for years, with research from 2018 suggesting that the 50 most-polluted cities in the world are within Asian countries.
So now, with airlines grounded, traffic diminished and factories turned off, health experts are even advising that the drop in carbon dioxide and nitrous oxide levels could actually save as many lives as have been lost in certain cities.
Of course, none of this detracts from the devastation precipitated by the pandemic, not only in the loss of life but also in the loss of everyday activity, with social interaction curbed, businesses closing and many people now out of work.
The virus has also magnified underlying social inequality in countries across Asia, from the viral outbreaks in migrant-worker dormitories in Singapore to a shortage of food and supplies for slum residents in Manila, and underlying disparities in access to health providers in India.
For this reason, we have also seen a shift in focus from ESG investors, with Covid-19 bringing social and governance factors especially to the fore. Greater scrutiny is now being placed on the social impact of corporate activity and how businesses have treated their workers during the pandemic.
So even as lockdowns are lifted, and we look to breathe life back into the economy, there is no need to simply return to business as usual – a new ‘new normal’ is possible.
Companies with better risk governance models, transparency levels and better decision-making could be in a much stronger position than peers as we come out of lockdown.
This could also be the time to reassess investment practices and business models, address social inequalities, and present opportunities in areas like fintech, automation and renewables.
As mindsets shift in the age of coronavirus, investors in Asia are certainly paying increasing attention to sustainable investments.
Morningstar research highlighted record ESG inflows in Asia ex-Japan in the first quarter of 2020; while 74% of total ESG assets in the region are to be found in China, inflows over the period were actually driven by Taiwan and India.
Asia is expected, over the next decade, to be our growth engine, with over 60% of the world’s middle class predicted to reside there by 2030 – making it the perfect testing ground for the innovation and integration of green technologies.
Asian countries have, to date, not disappointed in that respect. Places like Singapore have been ahead of the game in low-impact urban design, water catchment, cloud seeding and even sea-water desalination.
Meanwhile, in Qingdao, China, trials are underway for strains of rice that are saltwater-tolerant, allowing crops to be grown in areas previously considered unsuitable, thus addressing concerns over food security.
Researchers from Hong Kong University have devised an energy cell that can convert waste heat into electricity. And in the Philippines, students have developed an eco-building material from recycled materials that could be an alternative to traditional concrete.
With growth comes opportunity, even in the wake of the coronavirus epidemic, and Asia’s engagement with sustainable development can be felt in the rise in responsible investing in the region.
Once considered a sacrifice of ‘value for values’, the integration of ESG standards has risen in popularity, particularly in the last few years. While still relatively nascent in the Asian market, ESG investing is on the rise.
Japan made a big shift in 2017 when the Government Pension Investment Fund – the world’s largest retirement scheme – made the decision to start tracking ESG indices, and now plans to increase its allocations to such.
And China hasn’t just sat on its hands since. While investor demand – and efforts to appeal to international investors – has certainly been part of the story behind ESG momentum in China, it has also been in large part a result of government regulation and oversight.
This year, the Year of the Rat – a symbol of the beginning of a new day – could prove to be the year of ESG in Asia. In China, not only are there new requirements from the China Securities Regulatory Commission that will necessitate all listed companies and bond issuers, by this year, to disclose any ESG risks associated with their businesses as part of their regular reporting, the world is also awaiting the rollout of China’s domestic carbon market.
Of course, the ESG landscape in the country isn’t perfect, with available (and comparable) data seen as one of the greatest lacuna. But Beijing has made the trajectory clear – and the road green!
Last year, President Xi Jinping emphasised the need for China’s Belt and Road Initiative (BRI) to be underpinned by ESG principles. To this end, the City of London Corporation’s Green Finance Initiative has helped develop a set of Green Investment Principles for the BRI and Chinese banks have issued BRI green bonds.
Indeed, China is now a world leader in green-bond issuance generally, ranking in the top three globally, with proceeds of US$3.8 billion in the first half of 2019 alone.
Even with this momentum, however, Asia still lags the US and Europe, which (collectively) make up about 80 per cent of sustainable investing assets. There is also considerable disparity between countries in the region.
In India, for example, while the government is introducing policy initiatives to combat pollution and move towards a much more sustainable development, the uptake in ESG thus far has been relatively muted, with the larger institutional investors failing to show their interest.
There is obviously work to be done here and there are still areas of immaturity in sustainable investing in Asia in general – including in terms of data and the gap between intention and integration – but the region certainly looks on track to be the next big thing on the ESG landscape.