Sustainable investing in Asia takes flight amid rising temperatures

With 2030 looming large and hitting net-zero targets seeming increasingly out of reach, asset allocators could find sustainable investing opportunities to help meet emissions reduction targets in Asia, sources said.

Sustainable investing is faced with a multitude of headwinds: Demand for environmental, social and governance funds has fallen in the past year, and asset managers have moved away from labeling their products as ESG as they face political backlash in the U.S.

Investors pulled $13 billion from U.S. sustainable funds in 2023, and global sustainable funds saw net quarterly outflows for the first time in the fourth quarter of the year, according to a Morningstar report on global sustainable fund flows published on Jan. 25.

Asset managers have also pulled back from ESG fund labels in the U.S., sources said. In June, BlackRock CEO Larry Fink­­ said that he would be retiring the term because it had become too “weaponized."

"It's a nasty environment (in the U.S.). And it's a very political environment and a rather corrupt political system that gives too much corporate power to polluters and to big companies,” said Jeffrey Sachs, president of the U.N. Sustainable Development Solutions Network and director of the Center for Sustainable Development at Columbia University, on the sidelines of the Asian Financial Forum held in Hong Kong in January.

“So I would suggest that non-U.S. financial centers like Singapore or Hong Kong pick up the slack and say, 'We will do the green financing. If New York won't, we will',” he said.

Outside the U.S., sustainable funds have fared better. European sustainable funds gained $76 billion in 2023 even though conventional funds had an annual outflow of $50 billion, according to the Morningstar report.

In Asia ex-Japan, sustainable fund assets totaled $61 billion by Dec. 31, a fall from the roughly $65 billion a year earlier, largely due to the fall in assets in China, which made up the bulk of sustainable assets in the region. However, sustainable assets in Taiwan, Thailand and India grew notably in the fourth quarter at 50%, 217% and 5.3%, respectively.

Taiwan’s sustainable asset growth was buoyed by the strong performance of the local market, and Thailand’s was boosted by the launch of 29 new funds, the report wrote.

In Southeast Asia, climate investments increased 20% year-on-year to $6.3 billion in 2023, according to a joint report by Bain & Co., Temasek, GenZero and Standard Chartered.

Despite the growing demand for sustainable assets in Asia, the funding gap remains large. Asia’s emerging markets need $1.1 trillion in investments annually to mitigate the effects of climate change and help its populations adapt to it, according to the International Monetary Fund. However, the region is currently receiving only $333 billion.

“In Asia, we've seen the regulators obviously come out with climate-related regulations, which are great. But from an actual flow (perspective) — I'm not sure that has happened materially yet,” said Janet Perumal, Hong Kong-based head of Asia-Pacific and head of investments APAC at Wellington Management.

The equator is where the effects of climate change will be the most obvious, and a large part of Asia sits in that area, she said. “We’ve had this really cold winter in Hong Kong, and it was the hottest summer on record last year in Hong Kong. As we're seeing more of that, and the implications on rice production or implications on flooding and all those sorts of things, I think that's probably an area that probably we'll see more requirements or needs for investment opportunities and options,” she said. Wellington had $1.2 trillion in assets under management as of Dec. 31.

A lot of the impact investing opportunities are in the private equity and venture capital space but there are public companies that are evolving their businesses. For instance, they might not be entirely focused on climate, but they are enablers of the energy transition or of adapting to climate change, through areas such as agriculture tech, Perumal said.

Mervyn Tang, Singapore-based head of sustainable strategy for Asia-Pacific at Schroders, agreed that there are opportunities among listed companies that are contributing to the climate transition.

“Shifting business models to adapt to the low-carbon transition is really key to net-zero transition plans,” he said. “This can vary by sector as well as by business — it could mean decarbonizing manufacturing processes through electrification in sectors like steel, or using sustainable aviation fuel for aviation as we have seen in Singapore.”

He has also seen large energy companies move to increase the share of their business in renewable energy, and automobile companies move to electric vehicles.

“Electrification is not only for cars,” Tang said. “We have seen a variety of industries, such as capital goods, invest in R&D and build business lines in electric alternatives for products that previously used fossil fuel.”

The efforts of these so-called traditional companies are not reflected in the share price performance of sustainable companies or funds, he said. “For example, higher oil prices from geopolitical uncertainty could drive a period where fossil fuels outperform alternative energy — but that same trigger could incentivize companies to invest in energy efficiency to be less reliant on more expensive oil.” Schroders managed £750.6 billion ($828.4 billion) in AUM as of Dec. 31.

The urgency to increase investments in the climate transition has risen in recent months. By February, the Earth had heated up by 1.5 degrees Celsius vs. preindustrial times — meeting the threshold of the 2016 Paris climate agreement.

Asia, which made up two-thirds of global growth in 2023, is heavily dependent on coal, which contributes significantly to global greenhouse gas emissions. Asian communities are also extremely vulnerable to climate change because of their geography and high population density, according to the IMF.

Time is short and 2030 is around the corner, said Manila-based Bain & Co. partner Yukiko Tsukamoto, who leads the firm's Tokyo sustainability practice. For nationally determined contributions to be achieved, action needs to be taken — and fast — to make an impact, she said during a briefing in Singapore on April 11.

Whether institutions invest in an old way or whether they invest in a green way will make a significant difference in the direction the world goes in terms of climate change in 2030 and beyond, she said.

China and Japan, the two largest Asian economies, have launched several sustainable initiatives throughout the years. The People's Bank of China released its sustainable taxonomy for green bonds in 2015, which was revised in 2021, and Japan has refined its corporate governance code and mandated sustainability disclosures for listed companies.

In India, new rules that state at least 80% of an ESG fund's AUM must be in line with its ESG strategy will apply starting Oct. 1. In addition, the Association of Southeast Asian Nations on March 27 released an updated version of its sustainable finance taxonomy that refines assessment methods and screening criteria for various measurements and sectors.

Meeting 2030 emissions reduction targets is an uphill battle, but not impossible, sources said.

“If you look at even the ACWI, financed emissions have dropped 22% since December 2017 according to MSCI,” Schroders' Tang said. Many asset owners have also implemented coal exclusions after setting the baseline year for targets, leading to even bigger drops in their portfolios, he added.

Companies and countries may also need to set new interim targets to reach their 2050 net-zero goals, Sachs said.

“We're in a situation where what really drives the change is, every year it's getting hotter, more crises, more floods, more droughts, more heat waves, and then governments finally respond, not to the corporate interest, but to the public ... Yes, we will probably constantly be setting new targets but we could still keep the target of zero by 2050. But we need to hurry,” he said.

More global pressure on politicians is needed to speed up the process, he added.

Frank Tsui, Hong Kong-based managing director and head of ESG investment at Value Partners, noted that regulators play a crucial role driving companies’ behavior, especially on the quality and compatibility of ESG disclosures.

“Regulations have to be very stringent to measure data, and whether they are equipped with the appropriate tools will be something that will help make things happen,” he said. “It’s all about the entire ecosystem, whether it’s robust, whether it’s consistent. But we are still in the early part of this journey here in Asia.”

Value Partners had an AUM of $5.9 billion as of Feb. 29.

On the ESG-labelling backlash, Tsui said that it could inadvertently create confusion among investors, potentially leading to divergent expectations and interpretations. Tsui believes investors could, among various aspects, view ESG integration as an essential risk assessment framework embedded in one’s investment process.

“When there are controversies on ESG-related news, the negative share price response comes quickly. But when there is an ESG rating upgrade on a listed company, share price tends to exhibit a more subdued reaction. So from that sense, you could see ESG integration serves more as an essential risk assessment framework,” he said.

“From an asset manager perspective, if we integrate and consider ESG, it helps (mitigate) some of the ESG controversies that create negative volatility in the share prices,” he said.