Led by China, Asia is emerging as the economic power house of the post-Covid world.
Asian nations are already the conspicuous choice of global equity investors as the region has had relative success in containing the pandemic and is set to grow faster than the rest of the world in 2021.
The Asian growth narrative has now another hard-to-miss dimension: ESG dominance.
China, the world’s second-largest economy, and its Asian peers accounted for 75 cents out of each dollar of capital invested in 2020 across emerging-market stocks compliant with environmental, social and governance (ESG) norms, according to EPFR Global data.
Globally, governments, corporations, and other groups raised a record $490bn last year selling green, social, and sustainability bonds. A further $347bn poured into ESG-focused investment funds: An all-time high.
Moody’s Investors Service expects sustainable-debt issuance to reach $650bn this year.
Asia already has the appeal of fast-growing technology behemoths such as Tencent Holdings and Alibaba Group Holdings, whose carbon-light digital businesses outscore the commodity and energy producers of Latin America, the Middle East, Africa, and Russia on ESG metrics.
Asia has also emerged as the technology and consumption engine of emerging markets in recent years.
More than 98% of the weight in the benchmark gauge for information-technology companies in the developing world comes from five of the region’s markets – Taiwan, South Korea, China, India, and Hong Kong – according to a Bloomberg report.
For most money managers, however, the main reason for buying Asian stocks in their ESG portfolios is not the mere presence of technology and consumer companies: It’s faster growth.
Asia, excluding Japan, is expected to expand 5.7% this year, compared with 4.5% for Latin America, 3.5% for Eastern Europe, and 3.1% for the Middle East, according to estimates compiled by Bloomberg.
In a wider sense, China is set to post the fastest growth in Asia for ESG investments after the country boosted exchange-traded fund assets 18-fold in the past two years, according to Bloomberg Intelligence estimates in January.
Interestingly, ESG investing is so popular in Japan that even Buddhist monks are getting into it.
Along with Japan, sales of socially-responsible bonds from South Korea overtook China last year.
India has a stated goal of transitioning to clean energy from mainly fossil fuels, and expects 40% of India’s power-generation capacity to come from non-fossil sources within two years
Here’s, then, the flip side of the story.
The region is the world’s largest greenhouse gas emitter, making the stakes for ESG bonds and loans all the higher.
But China pledged last September to go carbon-neutral by 2060. The next month, Japan said it would do so by 2050. South Korea, too, plans to reach there in 2050 with its “green new deal.”
The years sound a bit distant, but the scale of the task means funding must ramp up immediately.
From an asset managers’ perspective, the heterogeneous nature of different fund markets in Asia implies that the adoption of ESG has been quite diverse, according to a PricewaterhouseCoopers report. And challenges include lack of standardised regulations and data availability, as well as the absence of suitable benchmarks to measure fund performance.
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