Private capital is booming in the Asia-Pacific, and so is sustainable investing. The region now leads the world in bringing these two investment strands together, with a strong emphasis on shared values between private asset owners and managers.
With more governments, companies and financial institutions committing to reducing carbon emissions, institutional investors have realised quickly they cannot afford to be left behind. And while market participants across the world are taking note, investors in Asia Pacific (APAC) are emerging as pioneers among their global peers, according to BNP Paribas’ ESG Global Survey 2021.
Two overarching factors are behind this trend. First, with the region’s vast coastlines, several small island states and low-lying territories, countries in APAC are at significant risk from global warming and rising sea levels. Second, as pressure from at-risk communities, local media and companies mounts, more governments in the regionare taking their climate commitments seriously and driving policy changes, leading to top-down action.
In this context, APAC’s asset managers are now required to meet the region’s demand for net-zero-aligned portfolios and investment strategies. Given the scale of the investment required in the region to achieve net-zero, the potential rewards for those who can meet this challenge are considerable.
APAC investors emerge as Net Zero Leaders
The BNP Paribas survey studied investor action to support the goal of a net-zero economy by 2050. The survey identified three types of investors: Net Zero Leaders, who are already implementing their commitment to reaching a net-zero target, Net Zero Explorers, who have committed to a net-zero goal but are yet to start implementing it, and Net Zero Observers, who have not committed to a net-zero target yet.
Across the global sample in the survey, 37% emerged as Leaders, 36% as Explorers and 27% as Observers. Investors in APAC, though, are considerably more committed to reaching net-zero goals – 44% of the respondents in APAC were Leaders, while 41% were Explorers. By contrast, only 24% of North American investors fell into the Net Zero Leader category.
Exploring more asset classes and strategies
Asset managers in APAC will have to cater to growing demands among these Net Zero Leaders for suitable investments, an appetite that extends across asset classes and strategies. For the majority of survey respondents (88%), equities remain the primary asset class used in their climate-related considerations, according to the BNP Paribas study.
Even so, some 52% of APAC investors said they invest in thematic Exchange Traded Funds (ETFs), compared to 37% globally, and 16% in ETF broad market indices to reach their net-zero targets. Only about 8% of APAC investors choose corporate credit for these investments, the survey showed.
APAC investors are also employing more sophisticated strategies and tools to manage climate change risks, according to the Asia Investor Group on Climate Change (AIGCC).
Half the APAC investors surveyed in the BNP Paribas study said they include climate risk mitigation measures, such as portfolio temperature scoring, to help align their investments with net-zero targets. In comparison, 48% of global investors currently practice this.
A huge opportunity
Even as several APAC institutional investors have committed to lowering their carbon footprint, more need to join the fray to meet the Paris Agreement goal of limiting the rise in global temperatures to 1.5°C of pre-industrialisation levels. Indeed, the AIGCC estimates that the investment opportunity for Asia’s energy supply to achieve net-zero is between USD 26 trillion to USD 37 trillion cumulatively from 2020 to 2050.
The scale of the investment needed in the region makes the role Net Zero Leaders play even more critical. Some recognise the scale of the challenge and the opportunity. Australian superannuation fund UniSuper, for instance, is among the institutional investors in the region issuing and implementing Investor Climate Action Plans.
We put our carbon targets in place last year and set a net-zero carbon emissions target for our portfolio by 2050. This is our first push into being more mindful of our impact and measuring progress against those targets… The shift to sort of being more cognisant of the impact our investments are having is something I find quite powerful.noted Sybil Dixon, Senior Investment Analyst at the fund,
Organisations like UniSuper are key to driving a mindset shift in the asset management space and can lead by example.
It is encouraging to see APAC investors moving in the right direction. We look forward to seeing these numbers grow, not just in Asia, but across the world. The investment community must understand the critical role it plays in propelling change. Those asset owners and managers who haven’t yet thought about net-zero can learn a lot from APAC’s Net Zero leaders.said Jules Bottlaender, Head of Sustainable Finance, APAC at BNP Paribas Securities Services.
Investors in Asia Pacific (APAC) place a high priority on asset managers’ research, reporting and disclosure capabilities, as regulators in the region are insisting on clearer, more consistent, and transparent standards around environmental, social, and governance (ESG) reporting.