Acceleration of ESG adoption in Asia
Jack Lin, head of APAC client coverage at MSCI, looks at how the coronavirus has affected investor behaviour in the region, the factors driving increased interest in ESG investment and why demand for enhanced risk management tools continues to grow.
Over recent months we have seen an increased awareness of risk among investors in APAC, particularly in the early stages of the pandemic when there was a lot of uncertainty around how markets would react.
We have been called upon to provide a great deal of analysis and to stress test various scenarios. There has also been greater demand for data and more quantitative means of understanding the market and downside protection strategies - a notable trend that we expect to continue after the coronavirus.
Another interesting development has been the accelerated adoption of ESG and sustainable investing principles. We provide a full suite of ESG research, ratings, indexes and analytical tools; it has become our fastest growing product line.
If we look back to the mid- to late-2000s Europe was a leader in ESG investment, driven by greater social awareness among major industry players such as sovereign funds and pension funds. In APAC, ESG was already gaining traction before the pandemic, although at varying rates given the disparity of market development across the region.
For example, Australian companies have long been proactive in incorporating ESG principles, but Japanese firms are rapidly catching up and companies across the region are increasingly aware of the value of sustainable behaviour.
The threat to our wellbeing presented by the coronavirus seems to have focused minds at the individual investor level and the level of enquiries we have received for our ESG solutions has accelerated since the virus first emerged.
Governance has always been an important pillar of investing in APAC. But if we look at how ESG emerged in Europe, governments and individuals had a strong social awareness that pushed the trend forward.
The evolution of ESG
When I spoke to investors in Asia about ESG years ago, there was an assumption that they would have to give up something in order to have a positive impact. This was a luxury they felt they simply could not afford in a region where many countries were only recently emerging from poverty.
The concept has evolved since then, moving away from an exclusionary strategy for stocks such as alcohol or gaming companies (which were often the stocks that generated the highest returns) to a more sophisticated approach that takes a holistic view of how each company performs against the three pillars of environmental, social and governance.
Our empirical research based on live track data of our ESG indexes showed ESG strategies demonstrated resilience during the coronavirus crisis, which reinforces a longer-term outperformance trend in emerging market.
As a result, investors Jack Lin, head of APAC client can now see that ESG coverage at MSCI can potentially provide a meaningful contribution in terms of both risk management and alpha generation, which appeals to the pragmatism of investors in the region.
Asian economies tend to be highly sectoral. In this part of the world investors just want to see the numbers and the empirical evidence and will base their decisions on these facts.
For this reason, we are confident that adoption of ESG principles will continue to accelerate across the region.
It is also important to consider how the performance of APAC markets in recent years has affected investor attitudes to investing outside the region. In the past, Asian investors would have focused on domestic markets; when I was based in Shanghai, between 2003 and 2006 the domestic market tripled. However, such incredible short-term performance comes with significant volatility.
Investors in APAC have an increasingly globalised investment outlook and the pandemic has underlined the importance of diversification in portfolio allocation. In addition, we expect investors in other parts of the world to look more closely at APAC as in investment destination.
Hong Kong is now a global financial centre, but it has only emerged in the last couple of decades as a major global hub. The industry in APAC has a much shorter history and less institutionalised markets than Europe or North America, but as we see greater institutional involvement and more professional players become involved, risk management tools have become more widely adopted.
We understand that investors need more data and are running more sophisticated risk models across different asset classes. We strive to bring greater transparency to financial markets and support the evolving complex needs of the investment community.