Sustainable investing in Asia has seen an uptick, with asset managers eyeing a plethora of opportunities in the region notably due to carbon neutrality pledges at the sovereign level, but also at the corporate level as firms seek to improve their environmental, social and governance (ESG) considerations.
China's President Xi Jinping announced that China would aim to be carbon neutral by 2060 in September during the UN General Assembly in New York, whilst Japan's Prime Minister, Yoshihide Suga, and South Korea's President Moon Jae-in followed suit in October 2020 by pledging to reduce greenhouse gas emissions to net-zero by 2050. Hong Kong's chief executive Carrie Lam in November announced to make the same commitments by 2050.
"There's a lot of momentum right now with the net-zero commitments that were made at the end of last year. China, South Korea, Japan and Hong Kong have all pledged carbon neutrality and I think that’s very important. It's driving a lot of momentum on behalf of companies which are also pledging to make net-zero commitments and I think we will see more of that going into the Conference of Parties towards the end of this year," comments Eric Nietsch, head of ESG at Manulife Investment Management. Kiran Nandra, senior client portfolio manager for emerging equities at Pictet Asset Management adds that valuations have shot up since the announcements and that in the medium term, the pledges will bring a lot of opportunities in the region.
Goldman Sachs's equity research bulletin from January 20 estimates that China's net-zero by 2060 objective could bring in $16 trillion (£11.57 trillion) of total investments. Commenting on China's push to 'greenify' its economy, Frank Tsui, senior fund manager and head of ESG investment at Hong Kong-based asset management firm Value Partners says: "In the latest China’s 14th Five-year Plan, there were 5 binding targets under Green Ecology, including reduction of emission intensity per unit of GDP by 18%. While there are many initiatives to drive the decarbonisation targets (including 25% non-fossil energy by 2030, up from 20%), it is obvious that these shall lead to a faster transition to green energy in China such as solar and wind energy, in which Chinese upstream clean energy manufacturers are well-positioned to benefit from it."
Whilst Tsui acknowledges that a common challenge when assessing ESG factors at the corporate level in Asia is the availability, comparability and timeliness of ESG data, the region is catching up with the rapid rise of ESG awareness in recent years. He adds that excluding Japan, ESG scores are amongst the lowest in Asia due to the disparity of regulatory requirements for ESG disclosures. Despite this: Tsui says: "ESG-related disclosure progress for Asian markets also shows a marked change in acceptance by regulators and companies, for example, the latest announcement from China Ministry of Ecology and Environment established legal liabilities for Chinese corporates to report their emissions, and surrender allowances and credits if their emissions exceed the ETS quotas allocated to them." For the Asia-based asset management firm, the increasing awareness and strengthening of the ESG ecosystem in the region is similar in nature to being able to identify quality companies from a bottom-up perspective, in that good quality ESG companies deserve a premium and will attract material inflow, as well as deliver positive outperformance in the long-run.
Another theme, both a cause for concern but also where opportunities may be found, is on the social side with changing demographics, specifically the aging of populations. Nietsch adds that what makes Asia attractive from an investment perspective – the rapid economic growth, the billions of people living there who are increasingly well educated and joining the middle class – also create considerable challenges from a sustainability standpoint. "What is uniquely challenging for Asia is the pace that the transition is happening, it's three to four times faster than most developed nations. That means less people are entering the workforce and more people are being supported by that workforce. That will pose challenges to pension systems where coverage is already low. What we focus on there is where can we invest into businesses and technology that can improve the lives of the elderly and where can we find opportunities related to healthcare and nutrition," says Nietsch.
When it comes to factoring in political controversies and human rights violations in Asia into their ESG strategies, the asset management firms take a similar approach by leveraging their data and technology to better overcome these challenges. Nietsch says: "We incorporate political controversies and human rights on both the sovereign and individual company level. We have a sovereign ESG model and that includes a social score, which takes inputs from the Freedom House on political rights, and the World Economic Forum Global Gender Gap Index, among others. On the governance side, it also includes a score indicator of peace and stability." Manulife Investment Management further excludes investments in companies that manufacture cluster emissions and monitor a company's compliance with the UN Global Compact.
Tsui adds that Value Partners' responsible investing policy incorporates a negative screening approach to identify significant ESG violators and maintain them in their exclusion list. "Our proprietary ESG assessment ensures we assess ESG issues holistically via our engagement with the investees. While the ESG data disclosure remains as a key challenge to assess ESG factors for Asian corporates, we expect the strengthening of the ESG eco-system in Asia will drive positive impacts continuously in the long run," adds Tsui.
Pictet Asset Management has an overweight to China in its Asia strategy that is built on a bottom-up, therefore, not taking top-down views with a macro or political lens. "However, If there is anything that would impact the company negatively or even for stakeholders, then we would take that into account," concludes Nandra.