Asia’s Large Asset Owners Leading ESG Adoption – Cerulli

Survey suggests major investment institutions are demanding more from managers, while also building in-house capabilities.   

The majority of large asset owners in Asia have incorporated ESG considerations into their investment processes, according to a new research by research and consulting firm Cerulli Associates. Government-owned pension funds, sovereign wealth funds and insurers are leading the way at present, but their policies are expected to influence other investment institutions in the Asia ex-Japan region over time.

The report, titled ‘Responsible Investing in Asia 2020’, states that about two-thirds of asset owners follow a documented approach for ESG integration. A total of 65% expect managers to document their ESG integration approach, while 62% of asset owners surveyed said they seek information about ESG integration from managers, but do not make it a requirement.

The survey also found that asset owners are embarking on the transition from exclusionary investment practices such as negative screening, to ESG integration. According to their data, slightly more respondents chose ESG integration (69%) as opposed to those who chose negative screening practice (65%). More pension funds have adopted ESG integration approaches (76%), with insurers generally favouring negative screening (76%).

Less than half of survey respondents said they pursued active ownership, although 56% of pension funds claimed to being engaging with underlying companies on ESG-related issues.

As awareness around ESG grows, asset owners are expecting to use external managers’ ESG expertise, even as they embark on building their capabilities. The survey shows that 48% asset owners have built specialist ESG teams, while three-quarters saying they rely on external managers’ expertise on ESG matters. Around 70% pension plans said they were looking to build their capabilities over the next three years, compared with only 50% of insurers.

Cerulli’s findings also show that large institutional investors, especially in Australia and Hong Kong, are progressively moving towards systematically incorporating ESG factors in assessing risks and opportunities during financial analysis.

Australian investment institutions are seen as taking the lead in considering environmental risks when investing. The country’s 2020 bushfire crisis accelerated calls for institutional investors, mostly superannuation funds, to take climate change risks more seriously, and increased regulatory scrutiny. The Australian responsible investment market recently surpassed the A$1 trillion mark in assets under management, underscoring the importance of ESG investing.

“Against the backdrop of Covid-19 and environmental calamities, along with the strong push from policymakers, ESG-based investing is expected to evolve at a faster rate,” said Leena Dagade, associate director, Cerulli Associates.

“As awareness of the concept rises, investors are expected to take cognizance of not only material financial risks to their investment portfolio, but also external risks such as environmental and social factors that could pose risks to business operations, weighing on financials and impacting investment returns. Hence, it is necessary for managers to stay relevant by building ESG teams and investment capabilities to grab a share of the institutional business,” she said.

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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