ESG investing is growing strongly in Asia, according to J.P. Morgan Asset Management.
Net inflows into sustainable funds in 2020 was US$8 billion, nearly 10 times that of 2019, said Tai Hui, chief Asia market strategist, J.P. Morgan Asset Management.
"If you look at the trend, it is absolutely Japan, Australia and New Zealand where we've seen the biggest drive when it comes to sustainable investment," Hui said. "You will also see that more generally institutional investors will typically lead that effort. You have someone like in Japan, the GPIF [Government Pension Investment Fund] that is a big support of ESG investing. Similarly, Australian institutional investors are more mature investors in ESG investing."
The transition to net-zero carbon emissions is driving investment across the region.
"Economies committing to net-zero emissions by or near the middle of this century already made up 77% of Asia's 2019 GDP and 46% of the population in 2019, according to World Bank data," Hui said. "This is a powerful market shift that will shape the investment landscape in the region. Still, Europe remains the uncontested leader in ESG investing."
Integrating ESG or sustainability does not compromise on returns, Hui said. Hui pointed to a comparison of the MSCI World Index and the MSCI World ESG leaders, which tilts towards companies that outperform against MSCI's ESG ratings, which he noted have "mostly matched or outperformed the broader world index."
In addition to showing investment returns, the ESG market size is also expanding. Sustainable investment assets under management are ticking up at an 8% compound annual growth rate in Europe. They are also growing by 17% compound annual growth rate in the US, although Hui said that growth in the US is off of a lower base.
Demand in Asia is also more geared towards institutional than retail, Hui noted.
"In Korea, China, Southeast Asia, again, the institutional investors are embracing ESG much more closely compared to retail investors," Hui said. "Retail investors need a lot of education, a lot of explaining why they should be engaging in ESG investing. That's the first part. The second part, and this is different across parts of Asia, on the back of that, I think the idea or the value proposition of ESG investing, especially with retail investors, is still not clear. A lot of them would think, am I doing this for good, or would I get a return enhancement off the back of that as well."
Europe continues to dominate overall ESG assets, "accounting for about 81% of the global sustainable fund universe, largely because of its long history of responsible investing and favorable regulatory environment." In terms of fund flows, Europe also remains the leader in ESG investing. However, Asia is gradually gaining momentum.
In addition to increased fund flows towards ESG investing, Hui identifies the increasing number of ESG investment regulations being adopted or discussed in various countries in Asia as a driver for sustainable investment. This should help create "a sound infrastructure for sustainable investment, thereby boosting the momentum of ESG investing within Asia."
Further, Hui pointed to major Asian economies such as China, Japan and South Korea announcing net-zero/carbon neutral targets as a further driver. China's carbon dioxide (CO2) emissions will peak sometime before 2030, with the goal of achieving carbon neutrality, or net-zero emissions, by 2060.
To achieve carbon neutrality measures, J. P. Morgan Asset Management said that production of energy from coal will have to fall from 28% of current consumption to 2% in the next three decades, offset by a sharp increase in energy consumption from renewables and non-fossil fuels, from 15% to 78%.
Carbon emissions reduction could also profoundly impact heavy and energy-intensive industries such as steel and cement production. These industries will need to innovate or face rising costs of production, Hui also said.
"Carbon neutrality targets, I do think, hammer home the point, especially to retail investors, when it comes to investing in sustainable way or taking a greater look at ESG," Hui said. "If your government, in the case of China, South Korea or Japan, has a specific target to achieve carbon neutrality, they will institute policies off the back of it that creates investment themes, whether it's electric vehicles and renewable energy on the positive side, or impacts to iron, steel and cement on the negative side.
"Again, back to the point on retail investors, ESG can sometimes be quite an abstract concept, but having that ultimate goal and all the policies and potential opportunities and challenges, it helps the general public to have a better understanding/better grasp in making those investment decisions."
Editor's Note: Story substantially updated to include further comment from Hui.