Text size

ESG in Asia: Preparing for a paradigm shift

Listen to article

Wealth managers are increasingly looking at how the integration of ESG factors affect the risk and return of investment portfolios for Asia’s private banking clients. Asian Private Banker’s ‘ESG in Asia: The Rise of Responsible Investing in Asia’ report, sponsored by Robeco Asset Management, explores the current reality of ESG in Asia for private bankers and asset managers.

Download your complimentary copy of the ESG in Asia: The Rise of Responsible Investing in Asia report today to read exclusive findings.

Asian Private Banker, under the sponsorship of Robeco, explored the role of ESG in Asia’s private banking and asset management industry, drawing on quantitative and qualitative data collected from 187 key leaders and relationship managers from asset management firms and private banks in Hong Kong and Singapore.

ESG has become a recent buzzword for private banks and asset managers, as approximately US$23 trillion in assets being professionally managed under responsible investment strategies by late 2016. Being distinct from philanthropy or impact investment, ESG is not about putting social welfare above portfolio performance but about mitigating risks and improving alpha generation by introducing filters in the investment cycles that will help investors choose investments characterised by better governance practices and lower environmental, compliance, and operational risks.

The growth of sustainable investment, including ESG, has been robust in recent years with assets managed under sustainable investment strategies growing by 25% between 2014 and 2016. Compared to Europe, the US, and Australia, however, Asia lags behind as ESG-linked investments remain limited, but there is rising interest from Hong Kong and Singapore’s governments to promote the two cities as green finance hubs, proven by a series of initiatives such as the recent establishment of the Hong Kong Green Finance Association.

Based on our collected data, the research identified certain features of the ESG market in Hong Kong and Singapore. While the volume of ESG-related investments in Asia remains relatively limited, our findings highlighted some important characteristics of the market that allow us to be particularly optimistic for the future of ESG in the region. The penetration of ESG is particularly high among younger investors and women — 56% of those who invest in ESG-related products are less than 40 years old and 43% are women. At the same time and given that the region is experiencing “the largest wealth transfer in history”, ESG is expected to grow in the coming years as the so-called “next generation” will seek a more active role.

What is the age breakdown of your clients who invest in ESG-related products?

What is the gender breakdown of your clients who invest in ESG-related products?

On the other hand, three out of four RMs have less than 20% of their clients with ESG-related investments. For both asset managers and private banks, ESG-integration remains more popular than ESG-thematic investments, the former of which accounted for 81% and 66% of ESG-related investments for asset managers and private banks, respectively. From a thematic perspective, environmental themes are the top priority of private banks and governance ranks first among asset managers. What is more, asset managers and private banks adopt a wide array of ESG strategies, with negative screening and ESG-integration being the two most popular with 24% and 22%, respectively.

Further, we observe that private banks and asset managers implement different approaches towards ESG — for example, some firms outsource their ESG-related operations, while others prefer in-house solutions. Despite existing differences, however, data quality and quantity is one of the biggest challenges across the market. This showcases that there is still room for improvement in the functioning of the ESG market in Asia, but it is a problem that we expect to be ameliorated in the coming years as the ESG market in Asia develops and matures.

Asset managers have developed relatively stronger ESG capabilities and, compared to private banks, have allocated more resources to ESG-research — 41% of contributing asset managers have a specialised ESG team and 79% of asset managers will increase their ESG team headcount within the next 12 months. On the other hand, only 28% of private banks have a specialised team and 27% plan to increase headcount within the next year. However, our contributors on both sides of the market highlighted the difficulty they face in finding specialists in ESG with a solid background in investment remains a daunting task.

Based on our collected data, there is no denying that Asia’s first generation HNWIs’ and UHNWIs’ familiarity with the ESG value proposition is far from satisfying. However, attributing the limited flows of ESG products in Asia to lack of interest among clients would be an oversimplification of the current landscape as an important part of Asia’s RMs and wealth advisors do not possess the necessary conceptual tools required to develop a deep understanding of ESG’s contribution to alpha generation and portfolio risk mitigation, and consequently educate their clients about ESG’s value proposition.

While familiarity with the concept of ESG among asset management firms remains relatively high, RMs have not yet developed a thorough understanding of ESG. As a senior representative recently argued at an Asian Private Banker event, if RMs are not confident with a certain product they will be unwilling to sell it to their clients. According to the respondents, 66% of RMs received limited or no training during the last 12 months, while almost 60% of contributing private banks and independent asset managers/family offices did not organise any ESG-related training programmes for their relationship managers in the last 24 months.

Over the past 24 months, how many ESG-related training programmes did you organise for your RMs?

Have you received any training on ESG during the last 24 months?

Consequently, RMs are still not very familiar with the concept of ESG and its value proposition, with private banks assessing it to be just above average — 5.6 out of 10. The fact that RMs self-assess their knowledge of ESG as significantly higher, 6.9 out of 10, highlights the lack of solid training plans and further reinforces our argument, described above. Apart from limited familiarity with ESG products across a particular segment of the Asian market and the unsatisfactory quality of data, we also need to highlight that the supply of ESG products is far from a Pareto frontier.

Against this backdrop, asset managers and private banks should focus on raising awareness among Asia’s professionals who will, in turn, impart the idea of ESG to their clients. It is important to help all segments of Asia’s private banking and asset management market understand that an a priori rejection of ESG, without deeply understanding its mechanism, can lead to problematic price valuations, inefficient risk management strategies, or investors overlooking investment opportunities, such as the recent agreement between the French company Danone with 12 leading global banks to link its US$2 billion syndicated credit facility with its ESG performance and lower the respective interest if the company increases its respective goals.

Predictably, there is a linear relationship between the difficulty RMs have convincing their clients to invest in ESG-related products and their training on the particular topic. As Asia’s next generation of HNWIs and UHNWIs emerge, the interest in ESG-related products is expected to intensify and therefore, asset managers and private banks should give priority to raising awareness among their employees and ensure that they align with the values and preferences of their clients.

To accomplish this, a two-pillar approach that pays attention to training and reach-out activities as well as improving the quality and quantity of ESG-related data is imperative and it will promote a deeper understanding of how ESG can contribute to clients’ portfolios and needs vis-a-vis ESG. In parallel, it will help professionals optimise the integration of ESG principles and develop an effective understanding with clients with respect to sustainable investing.

Amidst a rapidly changing demographic landscape in Asia’s private banking industry, asset managers and private banks that identify this emerging challenge will turn today’s challenge into an important investment opportunity and emerge as thought leaders in Asia’s sustainable investment industry. Furthermore, apart from existing initiatives taken by firms, regulators have also been offering training opportunities, such as the recent partnership between MAS and the International Finance Corporation who signed an MOU that includes capacity building programmes that will “enhance the awareness and knowledge of professionals working in financial institutions on green finance issues”.

Looking ahead, 69% of our contributing private banks and IAMs reported a steady or growing interest in ESG products among their clients, a promising sign that validates the potential of ESG in Asia.

How active was the interest of your clients in ESG-related products in the past 24 months?

Do you plan to increase/decrease the share of ESG-related investments in your clients’ portfolio?

In this context, 81% of asset managers and 78% of private banks plan to increase the integration of ESG principles in their products within the next 12 months. In addition, 58% of our contributing RMs reported that they plan to increase/decrease the proportion of ESG-related investments in their clients’ portfolios — a percentage we can expect to see increase looking ahead.

Do you plan to increase the integration of ESG principles in your products within the next 12 months?

Do you plan to increase the integration of ESG principles in your offered products within the next 12 months?

Download your complimentary copy of the ESG in Asia: The Rise of Responsible Investing in Asia report today to read exclusive findings.

Have a confidential tip? Get in touch [email protected]

Related Tags