ESG Investing Steadily Advancing across Key Asian Markets

Besides Europe, Asia ex Japan was the other region to record net inflows in the third Quarter
Clear and consistent standards can help drive the ESG investing development
Regulatory authorities in various countries issued assessment guidelines and frameworks for ESG rating providers to enhance market confidence

ESG Investing steadily advancing across Key Asian Markets

This year, market volatility, elevated rates and yields have been hurting investor sentiments, but these factors fail to hinder the progress of ESG (environmental, social and governance) investing in
Asia.

According to data compiled by Morningstar, an investment research institution, the global mutual fund and ETF space recorded nearly USD3 billion of redemptions in the third quarter. On the contrary, global sustainable funds registered inflows of USD13.7 billion. Europe aside, Asia ex Japan was the other region that attracted inflows, which amounted to USD2 billion.

On the sustainability front, Asia may have had a slow start, but the region has seen steady growth in the past few years. China, for instance, ranks 17 out of 120 countries on the World Economic Forum's 2023 Energy Transition Index and is a new entrant in the top 20 countries, according to a report published in June by the World Economic Forum. According to the International Energy Agency, China added 160GW of renewable electricity capacity in 2022, and the country is set to account for nearly 55% of global additions of renewable power capacity this year and next.

Governments of various markets have been pumping resources to support sustainable developments, in turn, propping up related companies and their stocks or bonds. Investors have also come to the awareness that ESG investing could help portfolio diversification. As demand for ESG investing increases, we have also witnessed Asian regulators stepping on their gas pedals this year, to strengthen the transparency and standards of ESG ratings and data providers.

When managing and conducting ESG investments, asset managers often need to take reference to the data compiled by ESG ratings and product providers, who are not regulated institutions. It is, therefore, not unusual to see discrepancies across evaluation processes, standards and the extent of information disclosure. As a result of inconsistent standards and the potential conflicts of interest arising between data providers and firms being rated, asset managers and investors have yet to develop full confidence in the credibility of ESG ratings. This, in turn, has hampered the market's development.

Asian regulators step up transparency of ESG service providers

Early on, the International Organization of Securities Commissions (IOSCO) urged regulators worldwide to improve the transparency of ESG ratings, and address the issue of potential conflicts of interest between rating providers and companies being assessed. Recently, the Securities and Futures Commission of Hong Kong announced the introduction of a voluntary code of conduct for ESG ratings and data products providers. The code, to be developed by an industry-led working group, will align with international best practices as recommended by the IOSCO, and will be consistent with other major jurisdictions. The proposed code of conduct aims to improve the transparency, quality and reliability of ESG information, facilitating asset managers to conduct due diligence or assessment on ESG service providers. BEA Union Investment believes a clear and consistent set of standards would be conducive to the development of ESG investing, as it can reduce the risk of greenwashing. Greenwashing refers to businesses or funds that pose themselves as more sustainable or green than they really are. They made these claims to attract ESG investors or simply with the hope of earning that "green halo". In the past, many investors who looked to invest to create positive value, ended up not taking that step on greenwashing concerns.

In addition to Hong Kong, South Korea has rolled out in May its voluntary guidance for ESG evaluation agencies, while Japan and India have also issued frameworks for rating providers. Recently, the European Union has proposed a regulatory framework for ESG rating providers intending to tackle the potential conflicts of interest and beef up transparency.

Developing the ESG investing market will inevitably take considerable time. Getting to the finish line and establishing trust will require concerted efforts from global regulators and investors.