Predicting the unpredictable future of ESG

FOR the first time since World War II, the world is experiencing a shift in which climate and the environment have now become the priority of governments and their citizens, as opposed to growth.

The recent Singapore Budget 2021 proves just that, focusing largely on sustainability and placing much emphasis on the country increasing its green efforts, beginning with the issuance of green bonds by the government.

The government announced that up to S$19 billion of public sector green projects would be identified to deepen market liquidity for green bonds, attract green issuers, capital, and investors, and anchor Singapore as a green finance hub. The Monetary Authority of Singapore (MAS) has also been driving the city state's Green Finance Action Plan to develop green finance solutions and markets for a sustainable economy in order for the country to catalyse the flow of capital towards sustainable development, not just in Singapore, but in Asia-Pacific.

While socially conscious investing is not a new phenomenon, it only recently started gaining momentum after the Covid-19 pandemic sparked investor interest over tackling issues like climate crisis, with some calling it the 21st century's first "sustainability" crisis that has renewed the focus on climate change, and a more sustainable approach to investment.

The pandemic also proved the resilience of green finance markets, resulting in a record year of issuance. Global green bond issuance reached a record high of US$269.5 billion by the end of last year and is expected to reach US$400-US$450 billion this year.

Long-term investors are now demanding that fund managers invest in sustainable companies as they are outperforming their competitors due to significantly improved market sentiments. Many are also rewarding companies that responded to the crisis by focusing on long-term goals, rather than prioritising near-term profit at all costs.

However, the growing popularity of such ESG (environmental, social and governance) investments raises the question of whether asset managers are just piling in due to its popularity and jumping on the bandwagon. There is great risk that the spike in attention for ESG is simply used as a marketing gimmick, diluting its true meaning and making responsible investing inauthentic simply because asset managers are fearful of losing out to competitors. This may lead to disappointing returns over time due to the lack of expertise in this sector.

ADDRESSING CHALLENGES IN ASIA-PACIFIC

At the same time, the adoption of ESG in asset and wealth management has not been growing at the same rate globally. While Asia-Pacific has slowly been gaining pace over the past few years, the ESG notion has not taken hold as quickly or strongly as in Europe or the United States. The United States issued the most green bonds in 2020, with a total value of US$51.1 billion, followed by Germany at US$40.2 billion and France at US$32.1 billion.

In order for Asia-Pacific to catch up, many challenges still remain. These include the lack of data availability, lack of standardised regulations and absence of suitable benchmarks to measure fund performance. Different approaches are also often required to be implemented when investing in European or US equities. A report by UBS said excluding "sin" stocks could be more challenging in Asia-Pacific because their exclusions are more likely to affect the factor exposures of the portfolio and the availability of suitable replacements is more limited.

To shed light on these pertinent questions and how these challenges can be addressed, the Investment Management Association of Singapore (IMAS) is organising a two-day virtual conference on March 9-10, 2021, where the most influential investors, thought leaders and technology firms will discuss the changing landscape of the economy and spotlight emerging innovations that will fundamentally change the asset management industry.

Mark Konyn, chief investment officer of AIA; Fiona Reynolds, chief executive officer of Principles for Responsible Investment (PRI); and Chong Jiun Yeh, executive director and chief investment officer of UOB Asset Management, will come together for a panel to discuss topics around the factors affecting investor thinking about ESG, challenges of ESG implementation in Europe versus Asia, and what the Asia ESG investing playbook may look like.

To ultimately compete with and exceed the world on ESG standards, Asia-Pacific will need to step up and lead on the ESG standards being set globally. As Singapore increases its awareness on sustainable efforts, it is important for both asset managers and investors to have a better idea on the risks and opportunities of this sector so that they gain confidence in deciding whether to allocate their money to this dynamic region.

• The writer is chief executive officer of Investment Management Association of Singapore (IMAS)