Reaping the growth potential of Asia and ESG

As the rollout of COVID-19 vaccines began in early 2021, economies around the world also received a shot in the arm. In Asia, market sentiment has improved on the back of better pandemic containment and positive progress on vaccinations, which has allowed for the progressive reopening of country borders and the creation of travel bubbles that could benefit business and tourism recovery in the region. The signing of the Regional Comprehensive Economic Partnership (RCEP) Agreement between China, Japan, South Korea and other ASEAN members in Q4 2020 also implies lasting benefits for intra-regional trade, which should stimulate economic growth in the short-term.

In the long run, significant investment opportunities, including Environmental, Social and Governance (ESG) themes, await to be discovered in Asia ‒ thanks to favourable demographics, increasing purchasing power from a growing middle class and vast room for productivity gains and infrastructure development. In addition, the combination of relatively stable markets such as Singapore and Malaysia and growth markets such as Indonesia, Philippines and Vietnam is also expected to provide huge opportunities.

Short and long-term positives in Asia

ESG has been one of the most popular investment themes in recent years. This has been supported by the rise of sustainable capitalism, which seeks to maximise long-term economic value creation by integrating ESG factors into business and investment decisions, and shift perspectives for both investors and companies from a short-term profit outlook to a longer-term horizon when it comes to business performance and investment returns. Sustainable practices are being demanded from businesses globally on the back of government policy, regulations as well as an increasing number of investors wanting their investments to be more aligned with individual beliefs and principles. Therefore, many countries in the region have set a clear, long-term development roadmap in this arena.

China announced its plan last year of reaching peak carbon emissions by 2030, and then realising carbon neutrality by 2060. Japan has also announced a ‘net zero’ emissions target for 2050. Investors should pay attention to these long-term plans as they will require significant redirection of capital flows towards related industries and companies.

Companies with high sustainability and quality growth on the rise

With increasing public demand for corporates to fulfil social responsibilities, more investors are considering to adopt a sustainability approach as their long-term investment strategy. As a result, many Asian companies have come to realise that ESG factors are increasingly impacting bottom lines and many are eager to improve their ESG standards. Asia is therefore an attractive choice for investors seeking sustainability impact and quality growth.

Since most Asian companies are at the infant stage of their ESG journey and are lagging other developed markets, retail investors may find it difficult to identify true ESG leaders, given overall poorer disclosure in Asia. This is why an active strategy that encompasses company-specific ESG analysis and engagement, and is supported by analysts with in-depth company and sector understanding, can help address this challenge.

Funds with ESG characteristics provide opportunities

Investors could select funds with higher sustainable investment standards, such as funds with a higher percentage of highly-rated ESG issuers in the portfolio, or those that target companies with more prominent sustainable characteristics.

Funds with higher sustainable investment standards invest selectively in companies with good ESG performance, as these companies play for the long haul and allocate resources more effectively, which is precisely the key to creating long-term value for investors. These funds may also invest in laggards with the potential to improve. Such companies are taken through the engagement process to help them realise their sustainability potential and create positive impact. However, if the companies fail to improve against agreed goals, or have deteriorating ESG characteristics, they will be sold off in the best interests of the strategy.

All in all, Asia’s ESG landscape is brimming with opportunities. Investing in companies with quality growth should generate better potential returns for investors in the long run, alongside relatively lower downside risk. Such funds could appeal to investors looking to capture the potential that is inherent in Asia’s journey towards a sustainable future.