The year 2019 is widely tipped to be the year when sustainable investments, including socially responsible investing and environmental, social and governance (ESG) investing, establish their place in Asia’s mainstream financial markets.
A recent announcement from The World Bank and Japan’s Government Pension Investment Fund (GPIF), the world’s largest pension fund, suggests more green, social and sustainable development bonds are on the horizon.
The move by the two market influencers comes as a follow-up to the joint research published at the 2018 World Bank Spring Meeting, "Incorporating Environment, Social and Governance (ESG) Factors into Fixed Income Investment".
“GPIF requires all asset managers to integrate ESG into their investment analysis and decision-making. We regard investments in green, social and sustainability bonds as direct methods of ESG integration,” says Hiro Mizuno, GPIF executive managing director and CIO.
“GPIF is committed to promoting ESG integration through our investment chain in order to ensure the sustainable performance of the pension reserve fund for all the generations,” Mizuno adds.
With about US$1.4 trillion in assets under management as of July 2018, the GPIF has a major role to play in shaping the direction of sustainable and ESG investing in Asia.
Lacking sufficient product
Much has been made of the lack of quality “green” products for both institutional and private investors to purchase in Asia, but that may also be changing with more frequent issues to meet the pent-up demand.
Among the most recent moves in Asia, ICBC Singapore issued its first green bond, totalling US$2.2 billion, the proceeds of which will be used to fund green ventures under the Belt and Road initiative.
Projects eligible for funding include renewable energy, low carbon and low emission transportation, energy efficiency, and sustainable water and wastewater management schemes.
DBS, the joint global coordinator, joint book runner and joint lead manager of the issue, reported that 91% of its transactions went to Asian-based buyers with the remaining 9% taken up by EMEA purchasers.
The numbers confirmed the belief that Asian-based investors will be happy to acquire financial products with a socially responsible focus when given the opportunity.
Asset managers took the majority of the tranche, snapping up 62%, followed by private banks, who took 27%, with the remaining 11% going to banks and other financial institutions.
Still bringing up the rear
But Asia still has a long road ahead to match the current activity in both the US and European markets, where governments have also reacted to political pressure by forcing through regulations embedding ESG investing principles into law.
Just this past month banking giant Citi issued its first structured green bond supporting the growing investor appetite for sustainable finance and the green bond market in the USA.
The proceeds will fund green projects in renewable energy, energy efficiency, sustainable transportation, water quality and conservation, and green buildings as defined in Citi’s Green Bond Framework.
Meanwhile, in London, the UK unit of Japan’s Nomura Asset Management has just launched its own Global Sustainable Equity Fund.
Nomura says the fund will offer investors exposure to companies aiming to make a positive impact on the environment and society.
The fund focuses on the United Nations Sustainable Development Goals, and will invest in a portfolio of 30-40 global equity stocks in sectors such as healthcare, renewable energy and fintech.
Commenting on the new fund, Alex Rowe, lead portfolio manager for Nomura Asset Management UK, says, “We are seeing considerable demand across clients for truly active, sustainable investment solutions, and we believe it offers something truly differentiated in this fast-growing sector.”
Sovereign funds recalibrating
Sovereign Wealth Funds (SWFs) are not immune to changing sentiment and are now being pushed into changing their investment strategies. This policy switch is without doubt a direct result of the accelerating awareness of changing weather patterns and intense pressure from their environmentally-aware domestic populations.
Ironically, the vast amount of wealth accumulated by leading SWFs has been gathered by extracting natural resources, principally oil and gas, and not always in a sustainable manner.
However, this will have to change. According to Massimiliano Castelli, UBS-AM head of strategy, Global Sovereign Markets, who was recently in Singapore to address a gathering of 40 SWFs, with climate change accelerating SWFs will have to consider reducing exposure to this sector.
The recent decision by the SWF in Norway to reduce its allocation to fossil fuels illustrates a trend that will undoubtedly gain traction over the next few years.