The rise of retail: Empowering the ESG transition in Asia

WHILE it is commonly accepted that environmental, social and governance (ESG) investing in Asia trails that of the United States and Europe, its rapid maturation has still been impressive.

Take for example that over the last five years, cumulative flows into ESG products across Asia reached a record high of US$260 billion. This coupled with the fact that Asia is expected to drive half of all global consumption growth over the next decade and become home to one of every two upper-middle-income and above households over that period, it is obvious that this part of the world is critical to the development of the global sustainable finance industry. Indeed, getting things right in Asia could ultimately decide the fate of long-term net-zero and sustainable development ambitions.

So what should be top of mind for industry professionals and policymakers to ensure that the ESG momentum continues? Much more work needs to be done to validate the true nature, value and impact of ESG-linked investment claims amid rising scrutiny around “greenwashing” and heightened investor expectations. Failure to make progress on this front runs the risk of undermining confidence in sustainable investing with dire long-term consequences for its growth.

The good news is that the twin drivers of technology and regulatory innovation hold the key to meaningfully overcoming this obstacle in the years to come.

Digitalisation has enabled market participants to advance their sustainability ambitions in ways that were simply not possible previously. At no other time in history have individual investors had so much power over their financial lives, nor have they had access to the volume of real-time information as they do today. Indeed, the “democratisation of finance” is in full swing and has fundamentally shifted the asset management landscape in favour of younger individuals and members of the “mass market”. Many of the innovations that have empowered this shift over the years – like no-commission digital trading applications and new low-cost investment vehicles and more – are here to stay and will play a pivotal role in further encouraging the emergence of a deeper ESG ecosystem.

As the retail investor segment becomes increasingly sophisticated across Asia, their demands for greater choice and influence will get louder. In Broadridge’s own work with leading financial institutions in the region, we are seeing consumer expectations rising when it comes to sustainability, personalisation and transparency.

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The implications of this for ESG investing go far beyond the products asset managers choose to bring to market to impact the fundamental way the industry enables investors to interact with their investments and have their voices heard. The most direct example of this for shareholders is enhancing engagement around key ESG initiatives for issuers through digital investor communications, as well as better proxy and mobile voting solutions.

But there are tangible constraints to innovation at present. For instance, accessing and aggregating high-quality ESG data is still an issue. The standardisation of sustainability metrics, definitions and disclosures is still in flux and there is a genuine sense of concern from global financial institutions trying to navigate overlapping compliance regimes.

Critical to addressing these hurdles will be encouraging a collaborative regulatory environment that brings cross-sector stakeholders together to share data, best practices and knowledge for capacity building at scale.

The policies developed by regulators thus far are promising not only for their ambition, but the way they have sought to meet opposing stakeholder objectives to move the ESG transition forward.

While some argue that the current “spaghetti bowl” of ESG regulations, disclosure requirements and taxonomies create significant complexities for issuers and investors, it also creates opportunity for more effective dialogue and meaningful collaboration. The most obvious benefit in the near-term is access to higher-quality primary data from enhanced disclosures, as well as a common language for cross-sector interactions. On the back of this, we expect the pace of change and technological innovation to make sense of this pool of information will accelerate. This will ultimately facilitate better benchmarking, decision-making and capital flows across the region.

It may be that the industry never agrees on a single common taxonomy or disclosure standards, but an emerging focus on framework and platform interoperability is taking shape. Critical developments in the ecosystem like the launch of Singapore’s ESGenome, a digital disclosure portal for ESG data that is compatible with reporting in line with globally recognised standards, are milestones we are watching closely that could have a major impact on the future of ESG innovations.

We are optimistic that Asia will take many of the right steps to advance the global ESG agenda. In many ways, given its position in the fight against climate change, it must take a leading role in driving change.

The writer is president of Broadridge International.