ESG has become a recent buzzword for private banks and asset managers, with global sustainable investments reaching US$23 trillion in 2016, up from US$18 trillion in 2014. Distinctive from Impact investments or philanthropy, ESG focuses on mitigating risks and improving alpha generation through the imposition of filters in investments decisions, rather than sacrificing portfolio performance in lieu of social welfare.
Dominance of ESG products in western countries. Europe and the US lead the growth of sustainable investing, capturing more than 80% of market share. Despite such, experts believe that Asia may potentially be the next frontier for the investment approach, which incorporates environmental, social and governance factors into companies’ decision making.
Rise of ESG in Asia. Compared to developed western countries, Asia still 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.
Preference towards ESG Integration. Based on our collected data, the research report identified certain features of the ESG market in Hong Kong and Singapore. To begin, compared to ESG-themed investments, ESG integration is more attractive to 66% of private banks and 81% of asset managers.
Higher penetration among younger clients. 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. Given that the region is also 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.
Data quantity and quality a challenge in the ESG Market. Private banks and asset managers implement different approaches towards ESG — 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.
Lack of ESG knowledge among RMs servicing Asian HNWIs. While end-clients might be sceptical towards the value of ESG, the biggest barrier is not their preferences but the limited familiarity of RMs with ESG and their consequent hesitation to promote relevant products. 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.
Lack of ESG training among wealth managers. According to the respondents, 62% of RMs received limited or some training in the last 12 months, while in the last 24 months, almost 60% of contributing private banks and IAMs/FOs did not organise any ESG-related training programmes for their RMs.
Limited supply of ESG products in Asia. 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 efficient. The need for increased supply of ESG products as well as the promising potential of the market is confirmed by the fact that 79% of asset managers plan to expand their ESG teams.
Promising development of ESG products in the near term. 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 interest of asset managers and private banks in ESG. 81% of asset managers and 78% of private bankers we surveyed, respectively, plan to increase the integration of ESG principles in their products within the next 12 months. As a result, 58% of our contributing RMs plan to increase/decrease the proportion of ESG- related investments in their clients’ portfolios — a percentage we can expect to see an increase in the not-too-distant future.
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This survey is conducted independently by Asian Private Banker, but is made possible through the sponsorship of Robeco.