Responsible investing, also known as ESG investing, can be expected to dominate the investment world in this new decade – and Asia could, ultimately, lead the way in this arena.
Let’s break down the ESG abbreviation. “E” is for “environment” and includes issues such as climate-change policies, carbon footprint, and use of renewable energies. “S” is for “social” and includes workers’ rights and protections. “G” is for “governance” and includes executive compensations, diversity of the board, and corporate transparency.
There’s no doubt that ESG is becoming a major phenomenon. The Global Sustainable Investment Alliance says such investing now totals an impressive US$31 trillion, an $8 trillion increase since 2016.
Currently, the US and Europe lead the charge in ESG investment, with a mighty 80% of the responsible-investing market.
Perhaps an example of how powerful ESG has become in recent years is that in 2019 in the UK for the first time in history more of the country’s energy was generated by renewable or green energy sources than by fossil fuels.
Similarly, Denmark hit a major renewable-energy milestone in 2019, producing nearly half of its electricity from wind power alone.
This hasn’t happened overnight, of course. It takes years of policy shifting, infrastructure building and, importantly, the will of investors.
While Asia might currently be lagging behind in terms of market share in the ESG investment space, I believe there are several key reasons this can be expected to change over the next decade.
First is demographics. By 2025, Asia will be home to 33 of the world’s 49 megacities, according to Global Data. The rise in the number of megacities – cities in which there are more than 10 million permanent residents – will be fueled by millennials.
Countless studies show that members of this generation are more likely to take into account ESG factors before investing than other generations before them.
In addition, the “Great Wealth Transfer” will see an estimated $68 trillion pass down from baby-boomers to their millennial children over the next couple of decades – and it could make them even richer than previous generations. It’s expected that this significant wealth transfer will begin in the next few years.
Second, we can already see important shifts in Asia in the ESG direction. For example, China became the world’s second-largest green-bond issuer in 2018, just being pipped to the top spot by the US. Another example would be that in 2019 Asia had more stock exchanges with compulsory environmental, social ESG reporting than any other region in the world.
Third, there is an increasing amount of evidence and ongoing research that show financial returns are not diminished – indeed they’re often boosted – by those companies that offer ESG-compliant investment. This will not have gone unnoticed by either retail or institutional investors in Asia and will continue to do so.
And fourth, ESG investing will allow governments across Asia to realize and shore up some of their wider major policies. These include shrinking labor forces and weakening economic growth, migration, climate change, and global low-carbon transition threats.
For these reasons, I think that while Asia doesn’t yet lead the charge in terms of responsible investing, it could well do so by the end of the 2020s. The need and demand for ESG investment are growing – and this is likely to be just the beginning.