Asset and Wealth Management Research Digest PwC AWM Asia Pacific Market Research Centre October 2018 Responsible Investing in Asia-Pacific Globally, there has been an increased on responsible investing as a theme within the asset and wealth management industry. While definitions of responsible investing ( RI ) vary across international bodies, a set of globally recognised responsible investing strategies, as defined by the Global Sustainable Investment Alliance ( GSIA ) has emerged. Chart 1 Responsible Investing Strategies Strategy Positive/Best-in-class screening ESG Integration Corporate Engagement & Shareholder action Negative screening/ exclusions Description An approach where investments in industries, companies or projects are selected or weighted based on ESG criteria relative to industry peers. The inclusion of ESG factors into financial analysis by investment managers. Engagement activities and active ownership through voting of shares and engagement with companies on ESG matters. The exclusion of certain sectors, companies or practices based on specific ESG criteria. Common criteria include weapons, pornography, tobacco and animal testing. Impact Investing Norms-based screening Sustainability-themed investing Investments made into companies, organisations and funds with the intention to generate social and environmental impact alongside a financial return 1. Examples include microfinance, community investing and social business/entrepreneurship funds 2. Screening of investments according to their compliance with international standards and norms from international bodies such as the United Nations (UN) 3. Investment in themes or assets linked to the development of sustainability. These investments must address social and/or environmental challenges such as climate change, eco-efficiency and health 4. Sources: GSIA, PwC analysis 1 GIIN. What You Need to Know about Impact Investing. (n.d.). Retrieved from https://thegiin.org/impact-investing/ need-to-know/#what-is-impact-investing 2 Global Sustainable Investment Review 2016-. (n.d.). Retrieved from http://www.eurosif.org/responsible-investmentstrategies/ 3 Responsible Investment Strategies -. (n.d.). Retrieved from http://www.eurosif.org/responsible-investment-strategies/ 4 Responsible Investment Strategies -. (n.d.). Retrieved from http://www.eurosif.org/responsible-investment-strategies/
In Asia-Pacific ( APAC ), investments centered on responsible investing factors have gained momentum in recent years, led primarily by regulatory shifts. At the same time, large institutional investors have also taken the lead in incorporating Environmental, Social, Governanace ( ESG ) factors into their portfolios, prompting smaller institutions and private banking clients to take a more active approach on RI. Chart 2 APAC RI Assets by Strategy, 2016 (%) 1% 2.4% 2.9% 3.4% In this edition on responsible investing, we will begin by analysing the regulatory drivers of RI in the region, and deep dive into the pressing question for asset managers: Is there really demand for RI strategies? 56.8% 26.6% 6.9% Key Responsible Investing Strategies As of 2016, investors in the region have poured a total of USD1.1 trillion into responsible investments. ESG investments made up 56.8%, or USD621.5 billion of responsible investments, driven particularly by investments from Australia and New Zealand (USD477.0 billion) and Japan (USD120.0 billion). Corporate engagement and shareholder action strategies, on the other hand, were dominated by Japanese investments of USD289.6 billion as of end 2016. Sources: GSIA, PwC analysis ESG integration Corporate engagement and shareholder action Norms-based screening Negative/exclusionary screening Sustainability themed investing Positive/best in class screening Impact/community investing 2 PwC
Regulatory Environment for Responsible Investing Underpinning the growth of RI assets are regulators which provide a clear and supportive framework for stakeholders in the ecosystem to grow. To provide a holistic analysis of the regulatory environment in APAC, we have assessed the amount of corporate ESG disclosure required, the extent of non-government imposed corporate ESG disclosure, conduciveness of stock exchange for the promotion of ESG, pension funds ESG regulations, and adoption of stewardship code. Definitions of the respective terms can be found in appendix I. Chart 3 APAC Regulatory Environment Summary Table Country Government imposed corporate ESG disclosure Nongovernment (industry body) imposed corporate ESG disclosure Conduciveness of stock exchange for the promotion of ESG factors Pension fund ESG regulations Stewardship code Single factor (E,S, or G) Comprehensive (ESG) Australia Yes Yes High Moderate High Moderate China Yes Yes Moderate High Low Low Hong Kong No No Moderate High Low Moderate India No Yes Low High Low Low Indonesia No Yes Moderate Low Low Low Japan Yes No Moderate Moderate Low Moderate Malaysia No Yes Low High Low Moderate Philippines No Yes Moderate Low Low Low Singapore No Yes Moderate High Low Moderate South Korea Yes No Low Low Moderate Moderate Thailand No Yes Moderate High Low Low Vietnam No Yes Moderate Moderate Low Low 3 PwC
Regulatory Environment in Australia Compared to other APAC countries, Australia stands out with the most supportive regulatory environment. This is largely due to the early recognition of climate risks by regulators the National Pollutant Inventory, which charts the pollution emission of firms, was introduced as early as 1996. Since then, financial regulatory bodies such as the Australian Securities and Investment Commission ( ASIC ) and Australian Prudential Regulation Authority ( APRA ) have been also driving greater disclosure and compliance through new regulations targeted at financial institutions. Chart 4 Examples of RI-related Regulations Introduced in Australia Government imposed ESG disclosure 2001: The Corporations Act was imposed by ASIC the country s regulator to require the disclosure of social and environmental information on companies filing director s reports. It also applies to superannuation funds, which are required to disclose how ESG considerations are integrated into investment decisions. Sources: UN PRI, PwC Analysis Pension Fund ESG regulations 2013: APRA introduced a prudential practice guide to provide a framework for superannuation funds in terms of investments and risk management. Stewardship code 2017: The Financial Services Council, an industry body which represents fund managers, superannuation funds, insurers and advisors, introduced a stewardship code for its members. Regulatory Environment in Japan Likewise, the Government of Japan introduced one of its earliest environmental legislations in 2006, mandating firms with high greenhouse gases emissions to disclose their output to the public. The most profound RIrelated change in the country, however, is arguably the introduction of its own stewardship code in 2014. Modelled after the UK Stewardship Code, the Japanese Stewardship promotes a focus on the stewardship responsibilities of institutional clients. Signatories commit to complying with the principles of the code, which includes a focus on the sustainable growth of investee companies, as well as frequent disclosure of their stewardship responsibilities. As of 2018, there were over 200 Japanese-based stakeholders who have since signed up as signatories. While the stewardship code is not legally binding, the council driving the stewardship code has been revising guidelines to ensure local relevance. Chart 5 Number of Signatories, Japan s Stewardship Code, February 2018 158 Investment managers 28 Pension funds 22 Insurance companies 6 Trust banks 7 Service providers Source: Financial Services Agency, PwC analysis 4 PwC
Regulatory Environment in China Besides having an entrenched legacy of RI-related regulations, the active participation of regulators can also accelerate the pace of growth of RI. This is evident in China a late-comer to the RI scene which has risen to be become the second largest green bond issuer globally, trailing just behind the US. The growth of the Chinese green bond market can be attributed to a supportive regulatory regime for green bond listing, which has propelled the Shanghai Stock Exchange into a leading exchange for green bond listings, with 18 green corporate bonds traded on the market. As illustrated, the early recognition of RI by regulators provide players in the market with an early start, but latecomers can also create niche markets with strong regulatory support. Whichever the case, a strong regulatory framework is undeniably the bedrock of a vibrant RI ecosystem. 5 PwC
Institutional Demand for Responsible Investments While the environment might be ripe for responsible investing, the RI landscape cannot flourish without investor demand. Here s a quick snapshot of selected investments which have been made by institutional investors across APAC. Chart 6 Known Responsible Investments by Institutional Investors in Asia-Pacific, 2017 2018 YTD Japan Local Bank, insurer Local insurer September 2017: A local bank and insurer invested a combined USD100 million in a private equity fund dedicated to investing in small and medium enterprises and middle market companies in the ASEAN region. The target size of this fund was USD250 million. July 2017: An insurer invested USD100 million in a a Socially Reponsible Investment ( SRI ) bond issued and managed by an international financial institution. The funds will be used to finance projects with social outcomes in developing countries. September 2017: An insurer invested USD50 million in a SRI bond issued in a private placement format by a European development agency. The funds will be used to finance the loans that promote renewables energy. Australia Future Super Hostplus Local Government Super January 2017: The superannuation fund allocated 15% of its assets into a new local ETF. This ETF targets companies with carbon impact that is 60% lower than the respective industries averages. April 2017: The superannuation fund launched its RI option and outsourced the management of this option to a global investment manager. September 2018: The superannuation fund awarded its first fixed income ESG mandate of USD315 million to a global asset manager. Taiwan June 2017: The Bureau of Labour Funds ( BLF ) issued a Global ESG Quality Mix Equity Indexation mandate to four global asset managers at USD250 million each under the new scheme, and USD150 million each to the same managers under the old scheme. April 2018: The BLF appointed seven asset managers for its USD1.4 billion domestic ESG equity mandate. 6 PwC
Markets Focused on Responsible Investing Australia: There are growing signs of RI awareness and demand in Australia, particularly for superannuation funds. Since 2017, we have observed that superannuation funds have handed out RI mandates (see chart 6), as well as made direct allocations into RI-focused ETFs and funds. In fact, out of the 27 ETFs which have been launched since 2017, five are RI-focused. Several providers have also publicly announced that they intend to add more RIfocused ETFs in the near term. According to Responsible Investment Association Australasia, it is estimated that 81% of superannuations have incorporated some form of RI principles in their investment process. Chart 7 RI-focused ETF Launches in Australia, 2017 and September 2018 YTD January 2017: Local provider launches global-focused sustainability equity ETF AUM: USD 178.9 million November 2017: Local provider launches Australia-focused sustainability equity ETF AUM: USD 129.2 million March 2018: Foreign provider launches global-focused sustainability equity ETF AUM: USD 8.2 million September 2018: Foreign provider launches 2 ethicallyfocused ETFs tracking equity and bond indices, respectively Japan: Responsible investments are not only limited to traditional assets in late 2017, we saw a Japanese bank and life insurer allocate to a private equity fund which uses ESG screening to select local small and medium companies. Markets where Responsible Investing is Gaining Traction Outside of Australia and Japan, we are also seeing an increase in traction for RI among institutional investors in Korea, Malaysia and Taiwan. Taiwan: In Taiwan, the country s largest pension fund, the Bureau of Labour Funds ( BLF ) took the lead in the country, handing out overseas and local passive ESG mandates in 2017 and 2018. Malaysia: In Malaysia, Kumpulan Wang Persaraan ( KWAP ) the country s second largest pension is no stranger to Shariah investments, and has also publicly announced its ambition to hold ESG-compliant investments. It has outsourced ESG mandates since 2014, and is reported to be looking for more external managers to take charge of ESG investments. South Korea: In Korea, key institutional investors are also reported to be on the lookout for asset managers with ESG capabilities. Private Clients Demand for Responsible Investments Meanwhile, the growing attraction of responsible investing has also prompted private banks in the region to provide offerings for their clients. Many have established units dedicated to RI, and are offering products from ESG funds to private equity funds centered on impact investing. In 2017, a UK-headquartered private bank ramped up its RI offerings in Asia by introducing three ESG funds for investors, and offering introductions for ultra high net worth clients who are keen in impact investments. Besides making responsible investments available on an advisory basis, several private banks are also offering discretionary portfolios centered on responsible investing principles in Hong Kong and Singapore. In April 2018, a Swiss-headquartered bank launched its sustainability portfolio under its discretionary services, and has drawn both net new money, as well as investments as a result of investors porting existing funds from traditional portfolios. 7 PwC
How Asset Managers are Tapping on Individual Investors Chart 8 Modes of Entering Asia-Pacific markets with RI Offerings Do you have strong distribution capabilities in the market? Yes Do you have internal capabilities? No Enter a Partnership Yes No Access market directly Sub-advisory relationship Partnership with asset manager Partnership with research house/ consultant In APAC, there are four modes of entry for asset managers who are keen in offering RI-focused funds to individual clients: 1. Direct market access This applies largely to foreign asset managers, particularly those with a significant amount of distribution expertise in APAC, and have strong RI capabilities. 2. Sub-advisory relationships We have observed subadvisory relationships in markets such as China and Japan, where direct access can be challenging. In Japan, a local asset manager launched a global electric vehicle-related equity fund in January 2018 that is sub-advised by a Dutch asset manager. In China, another Dutch asset manager has also inked an agreement to become an advisor to a leading Chinese asset manager in April 2018. 3. Partnership with asset manager Partnerships between asset managers, which allow both parties to leverage on their existing capabilities, have also gained traction in the region. In China, a local fund manager linked up with a US-based passive provider in June 2018 to develop a new environmental A-shares strategy, while a Malaysian firm has also linked up with a UK-based asset manager to tap on its S-Ray machine learning and big data technology system to analyse the ESG-compliance of firms. 4. Partnership with research house/consultants Asset managers who are keen in building up their capabilities but do not wish to collaborate with industry peers can also opt to work with service providers from investment consultants to research houses to tap on their screening methodology. Today, there are a wide variety of service providers who are armed with local and global screening capabilities. Conclusion The RI landscape might be in infancy in APAC, but growing investor demand is likely to drive developments in the region. Opportunities are increasing, and foreign asset managers who have the advantage of a long track record in the RI space are well-placed to tap on the shifting needs of investors. With adequate understanding of local needs, these asset managers can successfully penetrate APAC markets. It is also not too late for APACbased asset managers to catch up these managers can leverage on their brand and know-how to tailor new RI offerings to suit the appetite of investors. That being said, the barriers to RI adoption for investors cannot be ignored. The lack of credible RI-related data, high minimum investments, and whether RI-focused products are living up to their investment claims are top-of-mind priorities for investors, and need to be addressed with both education and innovation. These issues cannot be tackled singly by asset managers, and require the close collaboration from all key stakeholders including regulators, investment managers, distributors, and service providers to make the APAC market more conducive for responsible investments. 8 PwC
Appendix I Definitions of respective RI terms Quality of government imposed corporate ESG disclosure Regulators can require disclosure on single factors (environmental, social, or governance) or comprehensive factors (ESG). Quality of non-government imposed corporate ESG disclosure Besides regulatory bodies, we also consider the quality of disclosure frameworks introduced by industry bodies. ESG regulations on pension funds Countries with mandatory ESG regulations are rated high, while those with voluntary disclosure are considered moderate. Those rated low do not have ESG regulations in place. Enforcement of stewardship code Countries with strict enforcement of stewardship code are rated high, while those with voluntary compliance are considered moderate. Those without stewardship codes are rated low. Conduciveness of stock exchange for the promotion of ESG factors We considered factors including whether the country s key exchange has ESG reporting requirements and sustainability-related indices, as well as provides sufficient training and guidance on ESG initiatives. 9 PwC
www.pwc.com/sg Look out for our next monthly edition of AWM Market Research digest to be released end-november 2018. Subscribe to our future research digests at our website here https://bit.ly/2s4hijh Contact Armin Choksey Partner, Asian Investment Fund Centre & Market Research Centre Leader PwC Singapore + 65 6236 4648 armin.p.choksey@sg.pwc.com Ivy Pan Manager, Market Research Centre PwC Singapore +65 8809 4597 ivy.j.pan@sg.pwc.com 2018 PricewaterhouseCoopers LLP. All rights reserved. PricewaterhouseCoopers and PwC refer to the network of member firms of PricewaterhouseCoopers International Limited (PwCIL), or, as the context requires, individual member firms of the PwC network. Each member firm is a separate legal entity and does not act as an agent of PwCIL or any other member firm.