While Asia still lags Europe and the United States in sustainable investing, the market for funds employing such strategies is healthy and expanding rapidly in the region, with Singapore and Indonesia leading the growth.
Asia’s sustainable investment assets – defined as funds employing sustainable investing strategies – stood at US$53 billion at the beginning of 2014, an increase of 32 percent from the US$40 billion at the start of 2012. That’s 0.2 percent of the global total.
These are the findings of The Global Sustainable Investment Review 2014, a report released on 24 Feb by the Global Sustainable Investment Alliance (GSIA), a group of sustainable investment organizations that include the European Sustainable Investment Forum (Eurosif) and Association for Sustainable & Responsible Investment in Asia (ASrIA).
Sustainable investment is an investment approach that considers environmental, social and governance (ESG) factors such as climate change and human rights in portfolio selection and management.
Globally, the sustainable investment market stood at US$21.4 trillion at the start of 2014, up nearly 61 percent from US$13.3 trillion at the start of 2012. The fastest growing region was the United States, followed by Canada and Europe. Together, they account for 99 percent of global sustainable investing assets.
Malaysia, Hong Kong and South Korea are the largest markets by asset size among the 13 countries in Asia where data was collected: Bangladesh, China, Hong Kong, India, Indonesia, Japan, South Korea, Malaysia, Pakistan, Singapore, Taiwan, Thailand and Vietnam.
Singapore and Indonesia are seeing the fastest growth, driven largely by local government policies to encourage sustainble practices. Singapore is positioning itself as a centre for technology and sustainable investment products while Islamic funds are a major contributor to the sector in Indonesia.
“We are encouraged to see a steady growth in sustainable investment assets across the Asia market, however this figure is very small in relative terms when compared with other regional and national markets,” said Jessica Robinson, chief executive officer of AsrIA.
“The Global Sustainable Investment Review highlights the massive potential for Asia in terms of building out sustainable investment as a mainstream strategy, as has been experienced elsewhere,” she added.
Investors’ growing concerns about sustainability issues, particularly relating to climate change, energy and resource scarcity, are expected to be an important driver for the development of the sustainable investment market in Asia in the coming two to three years, the report said.
Where the money is
The review defines sustainable investment as funds using these seven strategies:
- Negative/exclusionary screening
- Positive/best-in-class screening
- Norms-based screening
- Integration of ESG factors
- Sustainability-themed investing
- Impact/community investing
- Corporate engagement and shareholder action
The most commonly adopted sustainable investment strategies in Asia are ESG integration, which account for 44 percent of sustainable investment assets (US$23.4 billion) and exclusion/negative screening, making up 31 percent of assets (US$16.6 billion).
ESG integration is the systematic inclusion by investment managers of environmental, social and governance factors into traditional financial analysis; and exclusion/negative screening is the exclusion from a fund or portfolio of certain sectors, companies or practices based on ESG indicators.
Asia is a region full of contrasts: home to some of the wealthiest individuals, it also shelters some of the poorest nations. Financial markets and their actors are often accused of being part of the problem. And yet there is an opportunity for Asia’s financial markets to be part of the solution.
Exclusion/negative screening, which increased 53 percent since the start of 2012, is the fastest-growing strategy in Asia, followed by ESG integration, which grew 42 percent.
Meanwhile, there are indications that significant assets also exist in impact investing, a subset of sustainable investing. However, reliable data only exists for Japan , which alone stands at $5.9 billion in the impact-investing strategy, according to the report.
These are investments aimed at solving social or environmental problems, or specifically directed to traditionally underserved individuals or communities. Impact investing can also include financing that is provided to businesses with a clear social or environmental purpose, according to the GSIA.
Islamic funds are also a major contributor to sustainable investment assets in the region, particularly in Malaysia, where the government has been actively supporting development of the Islamic funds market for at least a decade, and in Indonesia.
Policy is crucial
Indeed, policy is one of the most important drivers of sustainable investing in Asia, the report said.
Several countries in the region are rapidly developing national policy and regulatory frameworks to increase ESG disclosure and reporting requirements.
The Indian Ministry of Corporate Affairs, the Philippines Securities Exchange Commission and Vietnam’s State Securities Commission and the Singapore Exchange are among regulators that have imposed more stringent reporting requirements on companies relating to sustainable practices over the past couple of years.
Asian countries are also exploring policy incentives to grow large-scale private investment in the clean energy sector, in light of their massive energy and infrastructure needs.
The Vietnamese government, for example, is working with the Asian Development Bank to develop a plan for investments in low-carbon power, transport and industrial sectors, funded by a public-private clean energy fund.
Authorities in India have deployed multiple policy tools—such as purchase guarantees and renewable energy certificates—to encourage investment into the sector.
Thailand has in the meantime more than doubled its installed clean energy capacity with the help of the feed-in premium program – which requires utilities to buy electricity from renewable energy producers at predetermined rates – introduced in 2010.
The private sector – and private money – therefore has a huge role to play in Asia’s transition to a low-carbon economy, ASrIA’s Robinson said.
“Asia is a region full of contrasts: home to some of the wealthiest individuals, it also shelters some of the poorest nations. Financial markets and their actors are often accused of being part of the problem. And yet there is an opportunity for Asia’s financial markets to be part of the solution.”
We are seeing positive trends in areas such as clean energy investment and increasing interest in green bonds – pointing to a dynamic market with huge potential,” she said.