Managers in Asia Are Playing Catch-Up on ESG
The total assets managed by ESG funds in the Asia-Pacific region is expected to more than double in three years, according to KPMG.
When it comes to investing in sustainable businesses, asset managers in the Asia-Pacific region are making strides to keep up with their peers in Europe and North America.
In 2025, managers in the APAC region are expected to collect total annual revenue of $1.82 billion in environmental, social, and governance funds, up from $860 million in 2022, according to the latest report from KPMG. It also predicts that the total assets managed by ESG funds in the region will reach $250 billion in 2025, a significant increase from $101 billion this year.
The APAC region has trailed behind global standards in ESG development. The average ESG score for companies in the MSCI APAC Index was 5.7 in 2021, lower than the global average of 6.0, according to an MSCI report last year. Only 1 percent of total assets under management in the APAC region was devoted to sustainable funds last year, compared to 8.3 percent in Europe.
But the KPMG report expects a recent wave of ESG-related regulations to change the status quo. In mainland China, for example, the government just issued the Guidelines for Green Finance in the Banking and Insurance Industry, which requires banking and insurance institutions to promote carbon neutrality. In Japan, authorities have started to require companies listed in the prime market to disclose ESG information in accordance with the Climate-Related Financial Disclosures framework, which was set by the Financial Stability Board in Switzerland.
“Regulators in Asia are actively establishing and executing ESG-related regulations by leveraging [the] frameworks and guidance set forth by inter-governmental organizations,” the report said. It added that the increasing regulatory scrutiny in the APAC region means that “non-compliance[, or] the opportunistic adoption of ESG practices, can expose asset managers to considerable reputational damage.”
The increasing pressure from asset allocators is also changing the landscape of ESG investing in the Asia-Pacific region. According to the KPMG report, more than half of asset owners in the region chose ESG reporting ability as one of their manager selection criteria in 2021, up from 29 percent in 2019. Forty-seven percent of allocators said ESG value alignment matters during the manager selection process, even more than proven track records (42 percent) and competitive fees (31 percent).
Listed managers in the APAC region might benefit from higher valuations with increased ESG integration. According to the KPMG report, asset managers with higher ESG scores tend to have higher price-to-earnings ratios, meaning ESG can serve as a “valuation premium.”
“While most APAC managers can be considered ‘Starters’ or ‘Fast Followers’ in the ESG space, we see considerable potential for firms with a willingness to evolve to become true ‘Market Leaders,’ attracting significant ESG-related inflows, as well as the potential to charge higher management fees and drive valuation uplifts,” the report concluded.