Is Asia finally waking up to the value of and importance of responsible investing?

For responsible investment, Asia represents a market with huge potential. In the face of slowing growth and mounting sustainability challenges – the progressively visible effects of climate change to name but one - environmental, social and governance (ESG) factors are increasingly on the agenda for mainstream investors.

Misconceptions over the financial value of incorporating ESG factors into investment processes are quickly dissipating as studies repeatedly find that it leads to increased performance and returns over the long term. For example, a recent study conducted by the University of Hamburg and Deutsche Asset & Wealth Management, the largest of its kind to analyze the relationship between ESG adherence and corporate financial performance, concluded that companies that prioritize ESG have superior long-term financial returns.

Yes, the understanding of ESG risks and the integration of this analysis into investment decision making is still at the early stage of development in Asia, but there are promising signs from a number of countries that progress is being made.

In addition to investors, stock exchanges across Asia have been playing an important role with many moving forward with enhanced requirements on ESG disclosure, including Hong Kong, Taiwan, Malaysia and Singapore. A growing number of the region’s bourses are now providing sustainability related indices, such as the FTSE4Good Bursa Malaysia Index, the Indonesia Stock Exchange’s (IDX) SRI Kehati Index and the Korea Exchange (KRX) SRI Index among others.

Another encouraging sign also comes from increased participation in the Sustainable Stock Exchanges (SSE) initiative – a PRI initiative co-organized with the UN Global Compact, UN Conference on Trade and Development (UNCTAD), United Nations Environment Programme Finance Initiative (UNEP FI).

"Yes, the understanding of ESG risks and the integration of this analysis into investment decision making is still at the early stage of development in Asia, but there are promising signs from a number of countries that progress is being made."

In September 2014 the Stock Exchange of Thailand (SET) became the first in Asia to become an SSE Partner Exchange, joining the likes of the London Stock Exchange (LSE) and New York Stock Exchange (NYSE) in signing the SSE’s voluntary commitment to promote sustainability performance and transparency in capital markets. Since then, SET has been joined by stock exchanges in Malaysia, Vietnam, Korea, Sri Lanka, Kazakhstan and India.

Dialogue on the concepts of stewardship and responsible ownership is also significantly impacting on the region.  The launch of Japan’s Stewardship Code and the Malaysian Code for Institutional Investors are changing market dynamics, with regulators in Korea and Hong Kong also considering guidelines for investors.  This focus on effective stewardship is a welcome development, providing guidance and best practice to enable investors to improve and demonstrate their commitment to active ownership and fostering more engagement from investors.

Undeniably responsible investment and ESG integration is becoming mainstream in European and North American markets.  This will only increase the demands on asset managers operating in Asia to move forward as sustainable investing strategies are increasingly being seen as a way to differentiate their businesses and attract capital.

At the same time, regional focus is also being given to green finance opportunities, as Asia shifts from brown to green and as China continues to demonstrate its leadership position in this area.  The ripple effect through financial centres such as Singapore, Hong Kong and Malaysia is undeniable. The emergence of green finance is key, not just because it will be central to growth as we undergo the transition to low-carbon economies, but it reinforces the importance of sustainability and long-term value creation, themes which underpin responsible investment.  As more organisations continue to see the benefit of using ESG factors to manage risk and identify new opportunities, and as a way to differentiate their businesses and attract new capital, 2016 could finally be the year that responsible investment really makes its mark in Asia.

Want to know more about the state of responsible investing in Asia? Jessica Robinson is Head of Asia (ex-Japan) at Principles for Responsible Investment (UN-PRI) and will be speaking on the topic of Responsible Investing & ESG: Global Trends, Best Practice and Why this is Important for Asia at the Asset Allocation Summit on Monday 18th April at FundForum Asia 2016 in Hong Kong.