Asia’s issuers and investors show a notably broad commitment to sustainable finance.
Our research was conducted before China’s decision in September to adopt a target of carbon neutrality by 2060 — a significant policy change that will have far-reaching consequences inside and outside China. Even before that, sustainable infrastructure, an acute need across the region, was attracting particular focus, while green bonds were also drawing adherents.
Strategies on environmental and social impact are less developed than in the Americas or Europe, but gaining ground. However, the pull towards more ambitious positions appears limited. Only about 30% of Asian investors say their clients, regulators and society at large are pushing them towards sustainability — the global averages are around 40%. Even so, 96% of Asian investors and 92% of issuers regard environmental and social issues as very or somewhat important. This puts the region’s investors ahead of even the Americas on this measure.
Issuers exceed their peers in other regions in expecting material change in the next five years. Over 40% expect to substantially reallocate capital away from activities challenged by environmental and social issues, or towards activities that promote positive environmental or social outcomes. The global average is 32%.
The Asian investors in our survey are well advanced in adopting firm-wide responsible investing policies: 53% have done this, second only to the Americas, and another 39% say they will.
They are ahead of all other regions in their commitment to taking companies’ ESG credentials and performance into account when it is likely to be material financially. They also score above the global average for always doing this.
Nevertheless, there are other areas where investors have room to deepen their engagement with ESG. Asian investors rank lowest globally on elements of ESG strategy, such as using impact goals and metrics as part of investment decision making; having an approach to identify material issues; and stewardship principles.
They also have a lower sense than peers in other regions that investors are responsible for ensuring their investments have good effects on the environment and society.
Mixed pandemic response COVID confirms ESG, but narrows focus on issues
Asian respondents send mixed signals over the global COVID-19 pandemic’s impact on their approaches to sustainable finance. Most positively, 40% of investors in the region, the most anywhere, report that COVID-19 has reinforced their belief in the importance of considering ESG issues.
Moreover, they are ahead of Europe and the Americas in emphasising the social wellbeing of employees as an investment criterion more than before. Two thirds regard it as more important now — well above the global average of 57%. However, the pandemic has prompted investors in Asia to reduce focus on a host of other environmental and social factors — to a greater extent than in other regions. De-emphasised areas which a net higher proportion of respondents treat as less important now include companies’ efforts to preserve biodiversity, their sensitivity to society’s needs, the resilience of their supply chains and their attention to pay disparities.
Meanwhile, Asia’s issuers are divided over the pandemic’s implications. A substantial 45% say it has reinforced their belief in the importance of becoming sustainable, though Hong Kong SAR and Singapore are somewhat below the regional average.
But for nearly one in five, it led them to reduce emphasis on sustainability temporarily as other issues became more important. This is particularly seen among Singaporean issuers, though mainland China and Hong Kong SAR are also above the regional and global averages.
In addition, Asian issuers have reduced their focus on similar issues to their investor counterparts since the pandemic. The region’s issuers exceed peers elsewhere in viewing cash and liquidity buffers, society’s needs, biodiversity and pay disparities as less important on balance for their organisations now. Those in Hong Kong SAR in particular put less emphasis on these aspects than before.
Conversely, Asian issuers are more concerned with the social wellbeing and, to a lesser extent, health of their employees. An unmatched net 53% regard social wellbeing as more important than before the pandemic, with Singapore (66%) especially strong on the point.
“Asian investors are the world’s most enthusiastic about sustainable infrastructure investment”
Infrastructure optimism Smart cities and water capture interest
Both issuers and investors in Asia see strong potential in sustainable infrastructure investment. Issuers share the global consensus that emission-free energy sources should be the top priority.
Hong Kong SAR and Singapore are particularly enthusiastic here, each recording scores above both the regional and global averages.
Asian issuers, especially those in Singapore again, are also more positive than all global peers about both smart city and water and waste water infrastructure investment, as well as being above average in their assessment of the potential in other sustainable areas (electricity storage, electrifying transport, carbon capture and storage, hydrogen power and lower carbon forms of hydrocarbon energy). Issuers from mainland China lead regional peers on most of these areas and their enthusiasm for all five technologies is above the global average.
Asian investors are even more enthusiastic. They rank first for the strength of their assessments of the potential in seven of the survey’s eight sustainable infrastructure investment categories and are a close second in the eighth (water and waste water).
Green borrowing growth Investors get into buying labelled debt
Issuers and investors in the region are starting to engage with green bonds and loans as a vehicle for sustainable financing. This reflects China’s standing as one of the world’s largest green bond markets and accelerating activity in other Asian countries such as India and Singapore.
Asian issuers’ high satisfaction with the instruments is notable. More than 90% were very or moderately satisfied with the experience of funding through these types of bonds and loans — the most favourable response of any region.
Although over a third of Asian bond investors do not buy green, social or sustainable debt and do not expect to start, the rest are starting to put capital to work in labelled bonds. In particular, an above average proportion expects to start buying this type of debt for the first time. Moreover, a below average proportion are current buyers who expect to reduce their allocations and 12% of bond investors expect to increase their allocations.
Disclosure doubts, but strong support Issuers alert to Paris Agreement and TCFD
Asian issuers have scope to accelerate their disclosure of environmental and social impact, but feel unusually strong support from their shareholders, lenders and bond investors for their sustainability efforts.
Nearly one in five issuers judges that the disclosures it makes are excessive — the highest proportion in the survey by some way, though issuers from mainland China are less concerned about this than regional peers.
The region also has the lowest share of issuers who expect to increase their disclosures and are content with this. Singapore is an exception: nearly a quarter happily expect to increase disclosure, in line with the global average. In contrast, Asian issuers score highest for disclosing about their alignment with the Paris Agreement (88% say they do this) and for reporting as recommended by the Task Force on Climate-Related Financial Disclosures (TCFD), at 62%. In addition, a below average proportion of them refuse to disclose any information on their environmental and social performance.
of Asian investors expect to increase disclosure on environmental and social issues
Issuers in all regions now feel their lenders and investors care about their environmental performance and impact on society, but this sense is slightly stronger in Asia.
Among Asian issuers, 76% say their bondholders care about their environmental performance — the highest share of any region, while 68% say lending banks care and 69% shareholders. All these rates are above global averages, which are 67%, 63% and 67%.
A similar pattern is clear from Asian issuers’ assessment of their investors’ engagement with their impact on society. On this issue, 71% say bondholders care, the highest anywhere, and 87% believe shareholders do. The averages are 58% and 73%.