Growing the good: Seeing the bigger picture of ESG Investment in APAC

This is especially true when it comes to investments in fixed income and credit. Individuals and banks were more concerned with returns than environmental impact. However, increasingly investors, banks and institutions are taking more conscious investment decisions that factor in ESG considerations every step of the way. Individuals are now more concerned about their impact on the forests, carbon footprint and rising sea levels. People want to make a difference in the environment while investing and ESG securities are the perfect vehicle for it.

With the rise of ESG investing, came the introduction of ESG indexes which are designed to help institutional investors effectively benchmark ESG investment performance and manage, measure and report on ESG mandates.

The topic of ESG has been quite extensively discussed when investing in equities, but less so when investing in fixed income securities and credit. Based on a survey from Financeasia in 2022¹, more and more investors are becoming conscious of ESG and are formulating strategies based around ESG policies.

Traditionally, equity markets were the main source of ESG investing, but that is rapidly shifting. More than 60% of investors that are buying GSS bonds and loans focus on the renewable energy sector, which is then followed by energy efficiency and transport sustainability².The study indicates that the rise of fixed income and credit markets ESG concerns are on the rise, yet remains relatively new. The ESG market has become popular to the point of credit rating agencies such as Moody’s and Fitch incorporating sustainability practices directly into their ratings, giving investors a direct choice into deciding where to put their capital.

The credit rating agencies are now taking extra steps to ensure that not only do their rating include an element of ESG but also rating them based on the company’s practices. This is a direct result of increased ESG interests and investment³

According to a global study from Morgan Stanley⁴, the issuance of green, social, sustainability and sustainability linked bonds has reach $1 trillion in 2021, an increase of 69% from the previous year and almost a 300% increase from 2019 when it was about $326 billion. The ESG market has grown at an incredibly fast past in the past 3 years alone⁵. 

An aspect of ESG that has little to no information and data about the impact ESG has on economies, ecologies and the environment. Although there is significant amount of capital being invested in ESG based securities such as fixed income and credit, what kind of impact do they have on the environment?

Based on a 2020 study titled “ESG as a Workforce Strategy” from Marsh & McLennan has indicated that the impact of investing in securities based on ESG are beneficial to economies, ecosystems, and environments around the world. The study concluded that the companies that are able to best satisfy and attract employees are rated higher in ESG performance than companies that do not. This is true on the aggregate level and the granular level that takes into account ESG problems⁶. 

An aspect that is vital for the growth of ESG whether the ESG based securities are fixed income, equities, or credit, is companies will need to start developing and releasing stronger disclosures. Companies will need to disclose more accurate data and information regarding the impact ESG criteria is having around the world and in parts the investments being made. What can help companies increase the quality of their disclosures is by having government regulators form parameters and standards that companies will need to abide by⁷. 

Investors who choose to invest in ESG-based securities, no matter what type of security it may be, are looking to make an investment that will either have a positive impact or have the least amount of negative influence. Investors want to understand the impact their investment and they want quantitative results that are directly correlated to the investment. It would be up to the companies to provide investors with accurate reports and studies. If companies are not able to provide such studies, investors might either be forced to forgo the ESG investment or might look into a competitor with higher standards for ESG disclosures.^{8 9 10}

Looking at the bigger picture

Financial firms have been introducing more ESG securities than ever before, especially with the rise of the industry. Companies can claim they are offering ESG securities that help the world heal while also promoting environmentalism. Investors in ESG securities want more than just promises. Investors are looking for concrete proof that the ESG products they are investing in are making a difference in the way they are marketed as and this is where ESG reporting will play a big role in the year to come.

Companies around the world have realized the importance of ESG reporting, with almost 50% of business leaders in Asia saying that they are taking approaches to sustainability more seriously when compared to a few years prior. Many countries in Asia and Asia Pacific have implemented guidelines such as CO2 emissions, trees planted and acres of forest protected. These guidelines have forced companies to start reporting on the long-term economic and social potential of ESG¹¹

Image Source: https://www.cfainstitute.org/-/media/documents/survey/esg-integration-apac.ashx

The CFA institute released a report regarding ESG around the world in 2019, titled “ESG integration in Asia Pacific: Markets, Practices, and Data¹² which found that overall ESG has become more prominent in Asian and Asian Pacific countries. If they are not more prominent, then there is much more awareness regarding ESG than before. For example, China has seen a drastic increase in ESG investing within the last few years alone. The rise of ESG in China has been attributed with investment companies initiating the development of ESG securities first, with demand following.

However, the circumstances in regards to ESG growth are quite different in India. During the time ESG considerations have gained significant momentum in other parts of the world, the momentum in India has been much slower during the same period. Some financial firms in India are not seeing the demand for ESG products or asset owners with investment policies that demand ESG practices be integrated into an investment manager’s process ¹³

Approximately 60% of financial professionals working in India have said they feel that corporate governance issues always or often impact share prices. This leads to less interest in ESG factors due to fears of reduced returns and reduced investor interests. One of the main barriers to growth in ESG investing, including India, is the limited understanding of ESG issues, the lack of culture in a company around ESG reporting and disclosure? And lack of client interest/demand¹⁴ 

Since the demand for ESG products is relatively low when compared to other countries in Asia, the need to generate reports and data is much lower. Despite this, awareness to ESG in India has been fueled by foreign investors and not local investors. Despite this, local investors may be made aware of the benefits of ESG and as a result, investment firms would be more inclined to produce ESG reports^{15 16}

The awareness around ESG has been growing significantly in the past several years, with more than $1 trillion being invested into ESG products. Overall, the sector is growing at a rapid pace but is lagging behind in certain markets such as India and Thailand¹⁷. With some awareness into the benefits of ESG, the industry can grow start to see growth in emerging markets and tremendous growth in developed markets.^{18 19}

With several key environmental crisis such as global warming, melting of the ice caps and increased CO2 levels increasing, individuals are becoming more aware of the impact that their investment is having the world’s ecology and environment. Individuals are understanding that there are severe consequences to their investments and there is more than just investment returns.

Investors are increasingly coming to the realization that the world they are living is slowly starting to change due in part to certain investments that harm the environment and that they are directly or indirectly benefiting. The growth of the ESG market will continue as more people become aware of the impact they are having on the world and the influence their investments are having in parts of the world they will never see. Despite never setting foot in areas their investments are being made in, investors now want a positive influence on those parts of the world.