Nine in 10 (90%) asset owners in the Asia-Pacific region have implemented or evaluated sustainable investment (SI) in their investment strategies in 2023, dropping slightly from 97% last year. This is in line with a global directional dip to 80% this year, from 88% in 2022, according to a recent survey.
Globally, client demand continues to drive motivation for implementing or considering SI, a trend defied by the Asia-Pacific region, finds FTSE Russell’s 2023 global asset owner survey. About 52% of asset owners globally cited client demand this year, an increase from 42% last year. In Asia-Pacific, this number slid from 45% last year to 29% this year.
Satisfaction with ability to deliver investment outcomes while implementing SI has also dropped in the Asia-Pacific region from 79% last year to 49% this year. This is in line with a global dip in satisfaction from 63% in 2022 to 58% in 2023.
Fixed income, sovereigns dominate
Fixed income remains the top asset class for SI allocations in Asia-Pacific (66%), significantly higher than the global average of 45%, the survey notes. This is followed by infrastructure (44%) and private real estate (43%). Among fixed-income asset classes, sovereigns topped the asset classes in which sustainability considerations have been implemented for the Asia-Pacific region, in contrast to the global preference for credit and corporate returns.
Similar to last year, separately managed accounts remain the preferred investment vehicle for the region’s asset owners to accomplish SI goals, but to a lesser extent. Distribution among the four investment vehicles used or planned to reach SI goals this year for Asia-Pacific is relatively even – separately managed accounts remain at the top (45%), followed by listed derivatives (41%), comingled and pooled funds (39%) and exchange traded funds (31%).
Regulatory challenges remain
In terms of sustainability issues, governance (53%) is the top priority focus for asset owners in Asia-Pacific, the survey finds. This is followed by social themes (43%) as well as climate and carbon (34%). Both social themes and broader environmental considerations (25%) reflected a significant decline from last year, which were 76% and 72% respectively in 2022.
The biggest challenge faced by Asia-Pacific asset owners when trying to meet regulatory requirements is an inability to align their portfolio with SI, cited by 52% of respondents – which may show a lack of clearly defined parameters around what constitutes SI, exacerbated by fragmented market views. Half of asset owners polled did not trust the quality of their data, and with asset owners operating in multiple jurisdictions, differences in disclosure requirements also posed a challenge to 38% of them.
Despite this, asset owners in the region find that recent regulatory developments around SI to be greatly beneficial for them. Two in three (65%) asset owners found the consolidation of environmental, social and governance (ESG) reporting standards bodies would be helpful to investors, as well as development of sustainable finance and green taxonomies (58%), and investor disclosures around SI strategies and outcomes (45%).
“While we see that SI in Asia-Pacific has dipped in line with global trends, the number of asset owners who continue to focus on SI in their strategies remains high,” says Tony Campos, head of SI, index investments group, at FTSE Russell. “We are seeing more awareness from asset owners on the importance of including SI, as well as more in-depth feedback around the barriers that they face in adoption. The views expressed by asset owners reflect a need for the industry to clearly define ESG parameters for both asset owners and investors alike to better understand SI.”
Sylvain Château, global head of product, sustainable finance and investment at LSEG, adds: “While the long-term trend for SI reflects a very positive trajectory, macroeconomic and geopolitical factors have influenced respondents’ short-term sentiment. But as SI strategies continue to mature and a focus on governance grows, the quest for the right data is likely to become an even greater priority for asset owners.”