Charles Yonts, Head of Asian ESG Research, Macquarie Group
25 March 2021
There was a brief moment early in 2020 when it looked possible that Environmental, Social, and Corporate Governance (ESG) issues would be shunted aside by the focus on COVID-19. However, as the year progressed, it became increasingly clear that the pandemic had only served to reinforce and strengthen the rise of ESG investing.
By almost any metric, capital inflows into funds that class themselves as having a sustainable objective or binding ESG investment criteria continued to accelerate through 2020. According to Morningstar, they grew by 88 per cent in the fourth quarter alone, and the year ended with assets in sustainable funds hitting a record high of $US1.6 trillion.1
While Europe and the US have traditionally been leading the growth of sustainable investing, Asia is now the next frontier in this space. A record $US5 billion was invested in sustainable funds in Asia in the last four months of 2020, bringing the region’s total to $US25.4 billion – up 131 per cent on 2019.1
A key driver behind the growth both in the region and globally is asset owners’ demand for ESG integration and more transparent corporate stewardship. Just under two-thirds (60 per cent) of asset owners ‘strongly agree’ that ESG criteria are important when selecting investment managers, and close to a fifth (19 per cent) had terminated managers on ESG grounds.2
Another key reason that ESG continues to gain so much ground is that it works. A rapidly growing body of evidence – both academic and real-world – is finding that ESG integration helps to deliver better risk-weighted returns.3
Fund managers’ attention has also been focused by regulators pushing for more transparency around ESG reporting among both corporates and investors. The EU’s Sustainable Finance Disclosure Regulation (SFDR), which came into effect in March 2021, is the most comprehensive regulatory regime for sustainable financial reporting. And it is now being used as a reference for regulators across Asia, as they ramp up reporting requirements.