Institutional investors eye impact as ESG approaches broaden in Asia Pacific
This can be seen from 205 responses by investors in the region as part of an annual study which, since its launch in 2017, has become an influential bellwether of the investment appetite of investors globally. In total, 770 investors participated, representing $27.5 trillion in assets.
There are four key observations worth exploring:
- Increasing challenges as ESG becomes more sophisticated
- APAC investors looking for new energy transition opportunities, and to generate higher returns with sustainable investing
- Active ownership becoming significantly more important in APAC – with real world outcomes crucial
- Net-zero growing in priority for APAC asset owners
“This year’s Schroders Institutional Investor Study demonstrates how quickly sustainable investing approaches have evolved in the APAC region. Industry initiatives in the region are also drawing focus to certain themes and asset classes,” said Mervyn Tang, head of sustainability strategy for Schroders in APAC.
Challenges increase as ESG becomes more sophisticated
Based on the study, more APAC investors say implementing sustainability is challenging (82%, up from 78% in 2021). This is potentially a reflection that ESG factors in many investors’ minds have expanded from screening and integration to areas such as active ownership and net-zero targets.
It is also important to recognise there has been a huge amount of regulation materialising from markets across APAC, ranging from asking investors to consider climate risks to additional requirements for sustainability disclosure.
“Enhanced reporting and transparency from asset managers, along with consistent and comparable data points, are unsurprisingly the most important factors to institutional investors when investing sustainably,” explained Tang.
APAC investors are also increasingly trying to measure, manage and deliver impact – almost half (48%) of survey respondents identify impact investing as a preferred approach to sustainable investing, increasing from 38% in 2021. This contrasts with negative screening, such as exclusion of alcohol and tobacco, which fell to 42% from 53% over the same period.
However, approaches like impact investing can be more complex to implement than blanket exclusion policies. Plus, they require more and higher quality investment data and other information.
“The increasing sophistication of our institutional clients across the APAC region and differences in priorities within the region – from the popularity of thematic investing to investors' preference on positive screening approach – have undoubtedly highlighted the importance of our Regional Centre of Excellence for Sustainability, which provides a local presence to support our APAC clients in their sustainability journey,” added Amy Cho, chief executive officer, Hong Kong, and deputy head, Asia Pacific, at Schroders.
APAC investors are looking for new energy transition opportunities, and to generate higher returns with sustainable investing
Alignment with corporate values (56%), along with regulatory and industry pressure (52%), remain the most common drivers of sustainable investing identified by APAC investors. However, the proportion selecting higher potential returns as a driver has jumped significantly from 34% in 2021 to 41% in 2022.
In particular, APAC investors are looking for opportunities related to energy transition. Almost two-thirds (63%) indicate such opportunities would encourage them to increase their adoption of sustainable investing. This is most clearly evident in Australia (75%) and Japan (68%).
Decarbonisation has driven policy actions from governments such as the introduction of carbon pricing mechanisms and formation of transition from companies. In preparation, APAC investors are seeking new investment opportunities that address the energy transition.
Active ownership rises significantly in importance in APAC – real world outcomes are crucial
More APAC investors agree that active ownership and influencing company behaviour are important to them when investing sustainably (36% in 2021, jumping to 52% in 2022).
Evidence of real-world outcomes is the most important feature of an engagement strategy for APAC investors, as with their peers elsewhere in the world. Yet the region attaches greater importance to clear and robust escalation plans if engagement fails (37% in Asia compared with 30% globally).
This shows how far what investors find important is broadening; more than half of APAC investors now say active ownership and influencing company behaviour are important, a substantial increase from 2021, added Tang.
“The same can be said for understanding the impact of investments on society and the planet, consistent with the rise in APAC investors identifying impact investing as one of their top three approaches to sustainable investing."
Net-zero is a growing priority for APAC asset owners, like the rest of the world
The goal of achieving net zero carbon emissions has been given fresh impetus by international negotiations on tackling climate change, such as the COP26 talks in Glasgow, Scotland, in November 2021.
The study shows 71% of APAC investors have made commitments to reduce emissions, many of which have pledged to reach net zero by 2050. A key focus is to understand the implications of these commitments to their investment portfolio. Less than one-in-10 (7%) in the region are not on the pathway to net zero, compared with 14% globally.
Further, 55% of APAC respondents believe that greater consensus on frameworks and methodologies will help them with their net zero journey. It will be important for APAC stakeholders to have a voice in their development.
Regional nuances across individual markets on sustainable approaches is significant
While increasing adoption of sustainable investing is evident across APAC, the survey highlights regional nuances - for example, from the focus on human rights in Australia to Japan’s interest in human capital as an engagement topic.
This reflects the importance of on-the-ground expertise to support regional sustainability priorities.
“While the motivations and approaches of investors share many commonalities across and within regions, a closer inspection of the Study results shows individual market nuances that highlight the need for on-the-ground sustainability expertise to help support our clients as they navigate challenges implementing sustainable investing,” explained Tang.
About the Schroders Institutional Investor Study
Schroders commissioned CoreData to conduct the sixth Institutional Investor Study to analyse the world’s largest investors’ key areas of focus and concern including the macroeconomic and geopolitical climate, return expectations, asset allocation and attitudes to sustainability and private assets.
The respondents (770 globally) represent a spectrum of institutions including corporate and public pension plans, insurance companies, official institutions, endowments and foundations, collectively responsible for US$27.5 trillion in assets. 28% of these respondents were Asia based investors. The research was carried out via an extensive global survey during March 2022.
Click here to read the full Schroders Institutional Investor Study 2022.
IMPORTANT INFORMATION
Investment involves risks. This material is issued by Schroder Investment Management (Hong Kong) Limited and has not been reviewed by the SFC.