What’s changed over 30 years of sustainable investing in Asia?

IN THE 30 years since opening our first office in Asia – a small Singapore shopfront run by one intrepid investment manager – a truly astonishing amount of change has happened in the region.

Today, Asia-Pacific is a vast area of opportunity from Pakistan to New Zealand, home to major financial markets and nations that are among the wealthiest in the world. In 3 decades, Asia has transformed into an economic powerhouse. To tell the story in numbers: 10 years from now, 60 per cent of the world’s middle classes will live in Asia, and by 2040, the region will account for 52 per cent of global GDP (gross domestic product) and 40 per cent of global consumption. Already, Asia has 2.3 billion, or more than half, of the world’s Internet users.

It’s not difficult to find innovation here, plus disruption of the status quo and opportunities for investors. Asian companies are transforming the global landscape. Eighty-seven per cent of the world’s technology patents are filed by companies in this region, according to McKinsey Global Institute.

One of the most striking changes is that Asia is no longer “the world’s factory”. Instead, companies across Asia are leading in fields such as e-commerce, 5G, gaming and social media. Chinese social media creation, TikTok, has twice as many users as US invention, Twitter. There is real excitement around the Asian tech companies that are bringing innovation, reduced costs, and new services, as well as ushering in the lower-carbon future.

For active investors, there is so much to find in Asia, from alternative energy, to automation tech, to the new Internet giants. To separate the wheat from the chaff, a laser focus on companies with strong environmental, social and governance (ESG) principles is vital, because this helps investors to understand how a business operates, where the risks lie and, in turn, how to generate better long-term outcomes.

Companies that ignore ESG factors are exposing themselves to serious risk. Investors need to understand how companies are considering their energy transition, their use of water, the health and safety of their employees, and how to protect and improve the natural environment around them. This is a critical decade of change and investors have a responsibility to actively engage with companies to improve their ESG standards.

Enterprises we’ve backed from the start of our time in Asia 3 decades ago include: Banks that have become multi-national; palm oil producers with sustainability at their core; and manufacturers of the semiconductors powering the globe. All have high ESG standards and have brought significant, long-term returns – for example, an Indian banking stock we hold has returned over 8,000 per cent in 24 years and outperformed the benchmark’s c.538 per cent return.

The Covid pandemic has undoubtedly driven new ways of thinking by governments, citizens, companies and investors. Asian policymakers have provided huge levels of support and governments have had to focus on social issues. Covid put the supply chain “just in time” model under huge pressure and may lead to it being replaced with more of a “just in case” approach.

One of the biggest changes is the rise of sustainable investing and the growing importance of ESG factors. This awareness and its influence on decision-making continues to grow and the discipline of ESG-focused investing is undoubtedly spreading. China now has a 2060 goal to achieve net zero, while India has set a 2070 target.

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Beyond ESG to real impact – the purpose of capital

Asia’s standing in the world has changed dramatically over the past 3 decades. In the years ahead, trading with the West may become less important as regional trading hubs continue to grow. The 10-nation Association of Southeast Asian Nations now represents 625 million consumers, and Thailand has become the trading hub for Cambodia, Laos and Vietnam. Eleven nations have signed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership to ensure strong and growing trade links, despite the withdrawal of the US.

Looking ahead, we see abundant opportunities for investment, with sustainability and climate change likely to come to the fore. Asian companies – with their technological edge and supportive political and economic backdrop – will be integral in steering the global agenda for change.  

Certainly, the higher interest-rate environment and expected economic slowdown do pose immediate challenges; however, much of this is already priced in. The MSCI Asia ex Japan index is currently trading at 11.7 times forward price-to-earnings ratio, which is more than one standard deviation below the 5-year average of 14.5 times. With valuations reaching multi-year lows, there could be more compelling opportunities here versus much of the developed world, especially as many Asian economies are just at the start of reopening. 

To tap into these opportunities, investors need to think beyond the near-term volatility. If there is one thing our 30 years of Asia investing experience has taught us, it’s the importance of taking an ESG-aligned, long-term view.  

The writer is chief executive for Asia-Pacific at abrdn.