The coming sustainable investing boom in Asia

Rising sea levels could submerge much of Bangkok, Shanghai, Ho Chi Minh City, Jakarta and Mumbai by 2050, according to new research from Climate Central, a US-based non-profit group. The paper claims southern Vietnam may all but disappear, and 10% of Thailand’s population now lives on land that will be underwater by mid-century. The displaced may number in the hundreds of millions.

Whether or not these projections come true, the past two years have been watershed years for climate change awareness in Asia. Mindsets have changed as extreme weather events, such

By Min Lan TanHead Chief Investment Office APACUBS Global Wealth Management

as heavy rainstorms in Jakarta, intense cyclones in Japan and atypically hot summers in Sydney, batter the region’s economies and livelihoods.

Indeed, Asia is among the world’s most vulnerable regions to rising sea levels, as most of its economic output and population are concentrated in coastal megacities. Fortuitously, policymakers are taking actions to address these risks. Indonesia, for example, has announced plans to move its administrative capital from Jakarta to East Kalimantan, which could cost upward of USD 33bn. Closer to home, Singapore is mooting a SGD 100bn multi-

decade initiative to mitigate the dangers of rising sea levels. But much more is needed – the Asia Development Bank estimates that Asia will require an annual investment of USD 1.7trn a year in infrastructure from 2016 to 2030 just to sustain current economic growth levels, 16% of which (USD 272bn) will be needed to combat climate change.

Against this backdrop, Asian governments are embracing sustainable investing (SI) – the incorporation of environmental, social, and corporate governance (ESG) considerations into investment decisions – to fill the funding gaps needed to address these sustainability challenges

From SI laggard to global leader

In Asia, attitudes toward SI have changed radically in just a few years. In 2012, the region had virtually no SI market. Today, some USD 5trn in financial assets under management (AUM) has signed up to the United Nations Principles for Responsible Investment (PRI). This is an important first step in engaging SI, as signatories commit to having responsible investment policy covering 50% of their AUM within two years. Asia also now has eight stock exchanges with mandatory ESG reporting, more than any other region in the world, and three countries – China, the Philippines and Indonesia – plan to join the list in 2020.

Meanwhile, Asia’s green finance market is booming. In just three years, China has become the world’s second largest green bond issuer, overtaking France, and ranking just behind the US with an 18% global market share.

SI may even help performance

Much of this shift toward SI started off as top-down driven. Now a ground-up narrative is fast developing as a rising tide of private and institutional money chases better ESG disclosures and practices.

Indeed, a big reason for the region-wide embrace of SI is the rising acceptance that SI does not compromise financial performance. In fact, an increasing body of research suggests that integrating ESG considerations may even enhance returns – especially in emerging markets, where the prevalent risk of poor corporate governance means that companies with strong ESG practices are rewarded. Over the last 10 years, the MSCI EM ESG Leaders Index (a benchmark for SI in emerging markets) outperformed the MSCI EM benchmark by 3.2% per year, while in Asia the MSCI Asia ex-Japan ESG Leaders Index has enjoyed an annualized excess return of 2.0% over the benchmark.

Beyond the pursuit of profits, large companies in developed markets are also rethinking their purpose and responsibilities, encouraged by consumers, employees and society at large.

Drivers of change in Asia: Smart cities and commodity disruption

With sustainability challenges coming into focus for governments and investors, “Asia’s smart cities” will be a key investment focus in the years to come.

Today, Asia is home to 16 of the world’s 28 megacities (populations above 10m), and the United Nations forecasts their cumulative population will double by 2030 from their 2010 total. To balance the costs of depleting resources with rapid urbanization and sustainable growth, many Asian cities are laying the groundwork to become “smart” over the next decade. This entails harnessing the tools of the fourth industrial revolution and rapid technological innovations to build sustainable cities of the future. Three themes stand out from an investment perspective: 5G, which is at the heart of the smart cities shift; healthech, which will transform how health services are delivered; and electric vehicles, which will be called upon to help alleviate the environmental challenges plaguing many Asian cities.

The focus on SI will also train the spotlight on the carbon and environmental footprint of the commodity sector – a key contributor of both gross domestic product and greenhouse gas emissions in the region. The commodity industry accounts for around 12% of Australia’s and Indonesia’s GDP and almost 15% of Malaysia’s. With growing calls to tackle climate change, ESG concerns are combining with major technological advances to disrupt commodity markets especially in coal and crude palm oil. This poses significant risk to those impacted, making it critical that Asia jumpstarts its plans to diversify its economies and build business models that are resilient in the eventual transition to a low-carbon world.

For investors, the rise in SI in Asia presents an opportunity to invest to do good. Those seeking exposure to the trend can do so through exposures in ESG leader equity indices, green bonds, and via thematic investing in themes like smart mobility.

MSCI EM ESG Leaders Index has outperformed the EM benchmark since the financial crisis

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MSCI EM MSCI EM ESG Leaders

Source: MSCI, USD NTR, UBS WM CIO, as of July 2019