The Asia Pacific region is one of the most dynamic areas of economic development and trade. But the region’s rise has also brought about environmental and socioeconomic effects.
Sustainability, development and the environment have complex interactions. Economies and corporations are increasingly developing the expertise, best practices and technology relevant to achieving sustainable development goals.
Similarly, asset managers are strengthening the management of risks associated with environmental, social and governance (ESG) factors across their investment platforms. Investors also have twin goals: to capture returns and to do so in a way that aligns with their values.
Asia Pacific’s assets under management in sustainable investments have increased nearly threefold over the past three years to about US$34 billion ($45.7 billion), as of September 2020. Australia is a front runner on sustainable investing, and investors in Japan and Taiwan are showing growing interests. With recent regulatory developments towards promoting sustainable financing, Singapore has also seen increased demand for ESG strategies.
Sustainable investing and Covid-19
Although 2020 has been tumultuous for investors, interestingly, the Covid-19 pandemic has not slowed the momentum of sustainable investing.
In the US, for example, there were almost US$118 billion of inflows to sustainable investment funds, against total market net outflows of US$28 billion, in the first half of 2020.
In terms of governance, Covid-19 has shown the importance of corporate resilience. The sudden loss of income, together with the need to completely and rapidly reorganise value chains and methods of interacting with employees and customers, has proven disruptive for many businesses around the world. Meanwhile, companies with strong balance sheets and robust capital allocation policies are being rewarded by shareholders. Diversity of boards and of management continue to be key areas of focus for shareholders1.
From a social dimension, the crisis is accelerating several long-term shifts, creating risks and opportunities that investors could factor into their decision-making. For example, as many employees around the globe have transitioned to working from home, there has been significant acceleration in digital transformation. Technological advances have allowed companies to better manage their infrastructure, more efficiently serve their customers and cut costs.
However, with automation replacing many workers under Covid-19 lockdowns, some jobs could be lost to technology permanently, which could create huge disparities in the workforce. Companies may need to step up investment in their human capital through continuous training and by improving the health and safety condition of workers. While these measures will inevitably increase unit labour costs, a more skilled workforce should help ensure the long-term sustainability of a company’s growth.
On the environmental front, the short-term reduction in greenhouse gas (GHG) emissions has been a positive. The collapse in oil prices has increased pressure on oil-dependent markets to diversify their resources, which could bode well for a greener future2. We will continue to monitor and are hopeful that this trend will persist.
Additionally, the cost of producing and storing electricity from renewable power such as wind and solar is becoming increasingly competitive, which will soften the impact of rising GHG emissions linked to economic recovery.
Meanwhile, European governments in July 2020 approved the biggest green stimulus in history with a EUR500 billion climate change plan, while China unexpectedly announced in September a plan for net-zero carbon emissions before 2060. China’s move has raised awareness on sustainable investing across Asia, including about the need for concrete commitments and actions. US President-elect Joe Biden is expected to embrace international climate diplomacy, and to make addressing climate change a priority.
We believe that increasing pressure from government regulations and policies, technology disruption and changes in expectations from consumers and capital allocation will continue to drive demand for sustainable assets.
For more stories about where the money flows, click here for our Capital section
Our approach to sustainable investing
We recognise sustainable investing represents a broad set of opportunities and that clients may choose to implement their views based on their explicit portfolio objectives1 . Our diverse product capabilities and global research platform allow us to partner with clients to build solutions that align with their objectives and values.
We believe ESG factors will increasingly affect the ability of companies to operate and generate returns, today and over the long term. By incorporating these factors in our investment research and decision making, where they are relevant and financially material, we can target enhanced risk-adjusted returns1.
As of end-September 2020, we manage over US$2 trillion of ESG-integrated assets across equities, fixed income, liquidity, multiasset solutions and alternatives, including a broad range of dedicated sustainable investment funds.
1. For illustrative purposes only based on current market conditions, subject to change from time to time. Not all investments are suitable for all investors. Exact allocation of portfolio depends on each individual’s circumstance and market conditions. Provided for information only, not to be construed as investment recommendation. Investments involve risks, not all investment ideas are suitable for all investors.
2. Forecasts, projections and other forward looking statements are based upon current beliefs and expectations. They are for illustrative purposes only and serve as an indication of what may occur. Given the inherent uncertainties and risks associated with forecast, projections or other forward statements, actual events, results or performance may differ materially from those reflected or contemplated.
3. Source: MSCI Carbon Portfolio Analytics, J.P. Morgan Asset Management, as at 31 October 2020. The number includes corporates only, Scope 1 & 2 emissions (direct) and correspond to the carbon intensity of the investment portfolio. *The fixed income universe is based on a blend of six sector indices, re-weighted on a weekly basis to reflect the sector allocation in the fund. MSCI carbon coverage: 57% for the portfolio, 60% for the relative fixed income universe.
Pauline Ng is the head of Asean equities and chair of APAC ESG Leadership Team at J.P. Morgan Asset Management. This is a sponsored article from J.P. Morgan Asset Management.
