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How Asian Investors are Changing their Sentiments on ESG Investing

Responsible Investment

How Asian Investors are Changing their Sentiments on ESG Investing

  • How Asian Investors are Changing their Sentiments on ESG Investing Investors are embracing the need to consider broader impacts that investments have on society and the environment as a whole.
  • Date: Jul 23, 2021
  • Category: Responsible Investment
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A recent study by the Asia Investor Group on Climate Change (AIGCC) sought to gather investor insights on defining and investing climate-aligned opportunities and the barriers to increased investment. The report provides a snapshot of current investor sentiment, highlighting some of the factors driving investor thinking and behaviour as they seek to respond to climate change risks and pursue emerging net zero investment opportunities.

The report found that appetite for climate-aligned and net zero investment continues to be strong across all regions and asset classes in Asia. This is against a backdrop of a lack of appropriate opportunities and measurement tools identified year on year as key barriers to investment. Asian investors are also growing increasingly sophisticated, reflected by the diversity of tools used and the increasingly nuanced approaches for different portfolios. Asian investors are increasingly considering aspirational net zero emission targets and commitments. Nevertheless, work needs to progress from ambition to target setting, followed by integration through increased fund manager mandates. The Task Force on Climate-related Financial Disclosures (TCFD) reporting remains prevalent among Asian investors.

Investors are embracing the need to consider broader impacts that investments have on society and the environment as a whole. An increasing number of investors have started or continued their work on climate change, despite Covid. Indeed, a green and sustainable recovery to the pandemic can provide immediate and longer term benefits for the climate crisis.

As we look ahead to the post-COVID investment environment, how are Asian institutional investors thinking about the opportunities and the challenges of investing in net zero emissions? What tools are Asian investors using and how are they allocating capital across different asset classes? How will Asian investors act as further details are released on the net-zero policies of China, Japan and Korea? This following case studies, taken from the report, sets out investor insights into these issues on climate investment in Asia.

1) Asian investors are growing in sophistication

To assess climate impact within their portfolios, investors are looking at a wider range of methodologies, from existing methodologies provided by ESG data service providers, indexes and ratings (e.g. TCFD, SBTi), to proprietary tools developed in-house to price externalities.

Case Study: Amundi-AIIB

Climate Change Investment Framework

Beijing-based Asian Infrastructure Investment Bank (AIIB) and Amundi, Europe’s largest asset manager, partnered to launch the AIIB-Amundi Climate Change Investment Framework in 2020.

This framework aims to provide investors with a benchmark tool for assessing an investment exposure to climate change risks and opportunities at the issuer-level, instead of just the instrument level. At present, green bonds have been the main climate finance solution in fixed income, but these do not always consider exposure to climate investment risks and opportunities of an issuer’s entire balance sheet, which this framework seeks to address. Additionally, being at the issuer level, the framework’s application can be applied across equity portfolios as well.

Under the framework, AIIB and Amundi will gather data on how companies are managing their performance in relation to the objectives of the 2015 Paris Agreement by rating them on three factors: climate mitigation, resilience and transition.

For example, to determine how a company is faring on the transition to a green economy, the framework will measure the percentage of the company’s green activities as a percentage of total revenue.

The framework translates key objectives of the Paris Agreement into fundamental investment metrics. In that sense, the aim is to define an investment universe for investors which include issuers that are more resilient to climate change risk and more exposed to opportunities not yet priced in by the market. The framework has been endorsed by the Climate Bonds Initiative. The framework will be updated annually according to the evolution of market best practices and thought leadership.

Rating system

A company is rated based on a scoring system that differentiates “A-list and B-list climate champions.” The A-list will be those companies that rate highly on mitigation, resilience and transition, while the B-list companies might score well on just one of those three factors. The idea is that the fund manager would then work with companies on the B-list to identify how they could improve their ratings and encourage them to raise their ratings to attract investors, thereby building climate change resilience and green technology development.

Implementation- AIIB Asian Climate Bond Fund

In January 2020, Amundi launched a $500 million Asian climate bond portfolio which is the first application of the framework. The emerging market corporate debt portfolio invests in labelled green bonds and unlabelled climate bonds and engages with issuing companies to help them transition their business models to increase climate resilience and green leadership. Adjacent to the fund, AIIB allocated funding for market education, engagement and issuer support in relation to the framework.

2) Asian investors have increased implementation of climate solutions

There are increasing ambition statements from sovereign wealth funds and investment managers on climate-aligned strategies.

Case Study: GIC

Greening the portfolio

GIC is a sovereign wealth fund of the Government of Singapore. GIC is a global long-term investor with well over US00 billion in assets under management and invests across a range of asset classes in the public and private markets.

Climate change is one of the defining issues of our era, with profound and growing impact on both the physical and financial worlds. GIC believes that companies with good sustainability and climate change practices offer prospects of better risk-adjusted investment returns over the long term. GIC expects this relationship to strengthen over time, as regulators, consumers and businesses increasingly act on climate change and other sustainability considerations.

As a long-term investor, GIC encourages portfolio companies to be aligned with the transition towards the low-carbon economy.

Here are some areas that illustrates how GIC is greening its portfolio:

a) GIC has invested in a range of climate-related opportunities, including renewable energy assets, green buildings, emerging technologies that support the low-carbon transition, and various impact funds. Past investments include Greenko (a pure-play renewable energy producer in India, diversified across solar, wind and hydro power), Energy Development Corporation (a vertically integrated geothermal energy developer and operator in the Philippines), and ChargePoint (a developer of electric vehicle charging infrastructure in the US and Europe). GIC continues to explore high-conviction ideas across multiple asset classes.

b) GIC is greening its real assets portfolio by ensuring that all buildings within it are environmentally sustainable, or have the potential to be retrofitted to improve their environmental footprint. For example, extensive energy reduction and sustainability efforts have been implemented at several of GIC’s wholly owned office buildings in various cities.

c) GIC’s effort is not limited to new assets, but applied to existing ones as well. Where companies are exposed to greater physical or transition risks arising from climate change, GIC engages with their management teams to discuss, and offer support for, the company’s plans to mitigate or transition away from those risks.

Ultimately, GIC takes a long-term and holistic approach to sustainable investing, which helps build resilience and diversification in their portfolio to achieve better long-term returns, and create more beneficial outcomes for the communities which the investments touch.

3) Carbon footprint analysis now commonly conducted by investors

This includes a consideration of physical risk and transition risk.

Case Study: Government Pension Investment Fund (Japan)

Scenario Analysis for Climate Change-Related Risks and Opportunities in the Portfolio

The Government Pension Investment Fund (GPIF) manages and invests the reserve funds of Japan’s Government Pension Plans. It manages assets of over .5 trillion and is one of the biggest pension funds in the world.

In its 2019 ESG report released in August 2020, GPIF expanded on the information disclosed last year, which was in- line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), to include a comprehensive assessment of climate change-related risks and opportunities across all major asset classes in the fund’s portfolio.

GPIF used the Climate Value-at-Risk (CVaR) method to analyze stocks and corporate bonds. This approach allows for calculation of the present value of the costs and benefits arising from climate change based on an assumed climate change scenario. The CVaR of a company can show how much a company’s value will change in the future due to climate change and allows climate change to be viewed as a sort of financial shock that impacts corporate value. CVaR enables integrated disclosure of the transition risks, physical risks, and opportunities recommended by TCFD, because it allows (1) policy risks, (2) technological opportunities, and (3) physical risks and opportunities to be analysed using the same yardstick—that is, their impact on corporate value.

Key findings of the CVaR include:

  1. Equity prices are estimated to actually be higher under a 1.5˚C scenario than under a 2˚C or 3˚C scenario due to the value generated by greater technological opportunities
  2. Fixed income portfolio shows the opposite trend, with the negative impact on the portfolio becoming smaller as policy restrictions become more relaxed
  3. Prices of assets in GPIF’s portfolio as a whole (excluding government bonds) is negative in the 3 ̊C scenario, positive in the 2 ̊C scenario, and significantly positive in the 1.5 ̊C scenario

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