Going Green

Usually the preserve of multilateral development banks, climate-sensitive financings are growing in popularity. A recent issue of so-called ‘green bonds’ from the Export-Import Bank of Korea hints at the potential for social investing to spread across Asia.

Asia is fast catching up on socially responsible investing (SRI), a concept already entrenched among investors in the US and Europe. Broadly, SRI is any investment strategy that seeks financial returns while doing social good, and often entails incorporating environmental, social and governance (ESG) analysis in making investment decisions.

As societies in Asia become more affluent and economies shift from basic needs and accelerated economic growth models towards sustainability, environment, inclusion and other drivers, SRI is becoming a much more important factor in decision-making.

“Asia is catching up fast,” said Hon Cheung, regional director of the official institutions group in Asia at State Street Global Advisors. “SRI principles are also being adopted by individuals and institutions in the region in their consumption and investment behaviour.”

Indeed, investors globally and, particularly, around Asia increasingly believed that key ESG considerations from climate change to globalisation could play significant roles in long-term investment performance, he added. “The practices of global firms can have an influence on the globally integrated marketplace of Asia.”

Many public-sector institutions, such as the Asian Development Bank, count sustainable and inclusive growth as part of their core mission. In February, the Export-Import Bank of Korea successfully issued a global US$500m “green bond”, becoming the first non-international financial institution in the world to do such an issue. Priced at 95bp over US Treasuries with a maturity of five years, the spread was the lowest for any new Korean bond since the global financial crisis that followed the collapse of Lehman Brothers in 2008, according to Kexim. Proceeds from the green bond will be used to fund loans to low-carbon, green sector exporters at competitive rates.

As Asia’s population continues to grow, demand for food, water, energy and other resources will, undoubtedly, rise in tandem. For Michael Baldinger, chief executive officer at RobecoSAM, a unit of the Dutch asset manager, the region is becoming an alternative to other markets as a place to make sustainable investments.

“A lot of activity and development can be seen in countries such as South Korea or China. However, Asia, as a whole, felt the effects from the global financial crisis considerably less than other regions, making it now an attractive region for institutional investors and investment managers alike,” he said.

Growing appeal

The past few years have been particularly significant for ESG investors, with many foreign responsible investors in public and private markets now seeking opportunities in Asia to capitalise on the region’s solid economic growth. The scarcity of arable land had become an important trend for Asia, said Baldinger: “Competition of soft commodities and food safety allow for opportunities to invest in businesses ranging from producers of fertilisers, feed, crop and seeds, manufacturers of relevant machinery to intermediary businesses, such as packaging, transportation and distribution.”

Although sustainable investment assets in Asia are limited, they are growing. According to a 2012 study by the Global Sustainable Investment Alliance (GSIA), more than 130 investment managers in Asia, as of the end of 2011, are using sustainable investment strategies with US$74bn of identifiable sustainable investment assets under management in Asian markets, including Japan. In many parts of Asia, Sharia-compliant funds, which have a strong SRI element, have enjoyed enormous popularity and have grown at a fast pace in recent years.

“The SRI potential in Asia is very good,” said SSgA’s Cheung. “Market maturity seems to be a leading indicator of take-up. In markets like Japan and Korea, environmental sustainability issues have developed a grassroots following, leading to a potential for retail interest. In other developed Asian markets, the leading institutional investors are playing an important role.”

“Not only do they want to do no evil, they want to make a difference and do good. That’s harder”

This trend among institutional investors can be seen across the region. The National Pension Service of Korea, one of the world’s largest pension funds and a signatory of United Nations-supported Principles for Responsible Investment (UN PRI) initiative, is increasing its allocation towards SRI across asset classes.

Khazanah Nasional, concerned about the finite nature of the world’s natural resources, advocates corporate responsibility and sustainability. “We continue our corporate research and development on sustainability valuation in examining methods to measure sustainability at portfolio investments,” the Malaysian sovereign wealth fund stated on its K-Perspectives website. “We are also engaged in the conservation of Johor Ramsar’s wetlands and continue to widen our scope of engagement through partnerships with various civil society organisations.”

Both SSgA and RobecoSAM are investment managers and are signatories to the UN PRI, according to the global investor initiative’s website.

“We employ a systematic approach that allows for identification of high-growth investment themes and integration of material extra-financial criteria into traditional investment analysis to build portfolios that generate superior returns and add value to existing asset allocations,” Baldinger said.

“Do no evil”

Still, sustainable investing in Asia is not without its obstacles. The lack of credible ESG data has often been cited as a key deterrent. Regional bond managers, using an ESG integration approach, also lag their peers in listed equities, according to the GSIA study. However, with exchanges from Hong Kong to Thailand increasing their oversights on ESG disclosures from listed issuers, there is an expectation that sustainable investors will benefit from more, and better, data.

While some investors in Asia are becoming increasingly aware of the concepts of sustainable investing and ESG integration, others are making more investment efforts to respond pre-emptively to future trends. Ming Wong, a co-founder of Asia Community Ventures, wants investors to think differently in the way they invest. “Everyone who looks at SRI when they invest, basically, they want to do no evil in their investments.”

Typically, SRI practices screen companies in investment portfolios to avoid harm. Some asset managers apply certain exclusionary criteria during negative screening to exclude from their portfolios companies that derive significant chunks of their revenues from activities deemed harmful to society. So-called “sin” sectors include alcohol, tobacco, defence and arms trading, gambling and pornography.

“So compared with SRI, I would argue that the people who embrace SRI are, in a way, doing it half-heartedly. It’s ‘I don’t want to do bad’, but why not chose to do good as well?” said Wong. “I chose to invest in something that can give me a blend of social, environmental and financial returns.”

Japan in front

Wong’s primary focus is impact investing, a strategy of making investments intended to create positive social impact beyond financial returns and this, too, is becoming popular globally. Increasingly, the family offices that Wong works with are taking sustainable investing to the next level. “Not only do they want to do no evil, they want to make a difference and do good. That’s harder.”

Also, it is a harder investment approach because the strategy involves looking at not just the financial aspects of the investor or pensioner, but the total well-being. “Not just money, but the health, environment and the community in which the pensioner lives,” said Wong.

Already, impact investing has heavily influenced Japan’s sustainable assets. The GSIA study found that about US$7bn of sustainable investment assets under management in the country are dedicated to impact investing. There are funds that invest in environment-related companies in China and other parts of Asia, as well as those that base investment evaluations on a company’s biodiversity initiatives and those that finance microfinance institutions. The surge in community investment-and-donation activities towards economic restoration after the March 2011 Tohoku earthquake shows investors have greater consideration on how their money is being used, according to the study.

Investors in Asia will continue to look for the sustainable returns offered by ESG strategies over the long term, said RobecoSAM’s Baldinger. “The growth of Asia’s ESG industry in recent years has seen the region, along with other high-growth areas, starting to play a role in the global ESG market alongside the established hubs of Australia, Europe, and North America.

“Since uncertainty in Western financial markets seems to remain for the time being, this, in turn, offers Asia the opportunity to close the sustainable and responsible investment gap on its Western peers, both as an area into which to invest and as a place from which to manage assets.”

RobecoSAM, he added, had been developing its sustainable investment capacity in Asia, especially in the private-equity team. “We see very good opportunities for future growth in the region in the coming years.”

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