Over the past years, the move to index investing and the increasing focus on ESG factors have seen ETFs evolve as an effective vehicle to deliver sustainable investing.
Asia Pacific, which is relatively nascent in sustainable investing is now attracting institutional investors and sustainability-conscious high-net-worth investors despite recent market volatility.
Driving this demand are the net zero commitments by four-fifths of the world’s economies that will call for at least 125 trillion dollars in investment by 2050.1
Hand in Hand With Sustainability
In addition to the robust demand for sustainable investment across the region, measures and regulations are increasingly being adopted and implemented by individual markets to support sustainable practices. Asset managers in Asia are enhancing their efforts to integrate ESG factors in their investment processes and private banks are building sustainability-related portfolios for their target investors.
«As the global leader in sustainable indexing2, our goal is to continue innovating so that more investors will have greater access to sustainable strategies,» said Sunita Subramoniam, APAC Head of Sustainable for ETFs and Index Investments at BlackRock.
«We are committed to the region by expanding our sustainable investing offerings with locally relevant, granular sustainable exposures to address local investor demand.» Following BlackRock Chair and CEO Larry Fink’s letter to CEOs in 2020, to make sustainability the new standard for investing, the asset manager has more than tripled the number of BlackRock iShares sustainable investment products in the past two years.
Its global sustainable indexing platform has grown to 196 ETFs, the largest global lineup of any firm.3
ESG is Gaining Traction in Asia
In Asia, sustainable investing adoption has been wide-ranging. Australia, Japan, and New Zealand have developed a strong demand for sustainable strategies. Equally, there has been rapidly growing interest from investors in Greater China and Southeast Asia.
While a lack of local exposure products in the region has held back investments in the past, the trend is changing. As many as 92 ESG-labelled ETFs were launched in Asia Pacific last year, more than the combined new ETFs over the past four years, taking the total of such ETFs to 166 by end of 2021.4
«We recently launched three new ETFs in Japan, including the first sustainable fixed income ETF in the Japan market and we are working on more local products to meet investor demand in the region,» said Subramoniam. Currently, BlackRock has nine APAC-domiciled sustainable ETFs and three APAC-domiciled sustainable index mutual funds in the region.
Offers for ETFs on the Rise
ESG-labelled ETFs have been used as asset allocation building blocks for distributors to create their own sustainable strategies. A number of private banks in Asia are now attracting significant assets in sustainable assets, which feeds further demand across the wealth space.
An Asia wealth management survey5 revealed that 2022 could be a banner year for sustainable investing in Asia, with the penetration of sustainable investing among wealth investors poised to more than double to 70 percent. It pointed out that investors found sustainable investing harder to navigate and sought end-to-end advisory offerings.
Despite new guidelines on mandatory disclosure imposed by nations from China to Singapore through to India, the region, and globally, still sees a lack of uniformity in sustainable taxonomy, which looks to provide agreement and clarity around sustainable activities, and disclosure levels.
Who are the Local Investment Experts?
As such, investors and local asset managers are leaning on global managers, who can sidestep these challenges, by launching sub-advisory partnerships, feeder funds and wrappers for the sustainable investing roll out. «Global players like BlackRock have the expertise and scale to develop proprietary in-house ESG scores and research processes for sustainable product innovation,» said Subramoniam.
«They also regularly engage with regulators around the region on topics from risk disclosures to capacity building to regulation of ESG data providers to expand and enhance the sustainable investment ecosystem and develop sustainable indexes and ETFs.»
iShares by BlackRock, for example, has a dedicated team spread across Hong Kong, Singapore, Japan, and Australia addressing the sustainable investment needs of clients. The team offers customized training based on clients’ existing sustainability knowledge, wider proprietary educational programs, as well as thought leadership, among other initiatives.
ETFs Become a Popular Choice for Sustainable Investing
«Asian wealth managers are increasingly looking at placing sustainability at the core of their clients’ portfolios and are adding more sustainable products to their shelves to support client demand in the region,» said Georgina Mitchell, iShares Specialist, Asia ex-Japan Wealth Distribution, BlackRock.
«We see wealth clients approaching sustainable investing in different ways and ETFs are a popular product choice.» Discretionary portfolio management clients are building entire portfolios with sustainable building blocks to ensure their investments at the portfolio level reach certain sustainable thresholds.
Some discretionary portfolio managers at private banks are adopting fully sustainable portfolios as parallels to their existing products, while others include sustainable thresholds across all portfolios on their platforms and incorporate sustainability into their investment process.
«We are fully supportive of the transition. Take the case of an Asian private bank, which wanted to implement stringent screens to replace long-term developed market equity holdings for its advisory clients, we worked with them to make the transition to sustainable portfolios,» said Mitchell.
«Incorporating developed market best-in-class equity ETFs helped prioritize higher ESG-rated companies and screen out those in sectors that don’t qualify. ETFs also allowed the private bank to meet its investment criteria without fundamentally altering asset allocation.»
Such efforts by asset managers to accelerate the transition have been crucial in sustaining flows in what is shaping to be a challenging year. Amid the equity market slump, ESG-labelled ETFs saw record outflows in May. However net inflows resumed in June and fund performance has also held up.6
Outlook for Long-Term Payoff Remains Attractive
While overall ESG-labelled categories have lagged their non-ESG-labelled benchmarks, key parts of the market have performed, convincing investors of the long-term allure. ESG-labelled ETFs lost 20.5 percent in the first five months of the year compared with a 19 percent fall for their non-ESG-labelled benchmarks due to their inherent underweights to energy, which have outperformed amid the surge in energy prices and overweight to technology stocks that have lagged.
However, in three broad categories — Europe-focused, US-focused and global — ESG-labelled equity funds have performed better this year, on average, than their non-ESG-labelled counterparts.7 Subramoniam noted the performance imbalance stemmed from macro challenges such as energy price surge and the outlook for long-term payoff should remain attractive.
«It is in such times our understanding of the market plays a crucial role in helping clients understand the move into sustainable investing will pay off in the long-term,» said Subramoniam. «Given the region accounts for over half the global emissions and has a central role to play in the transition, we are confident the Asian sustainable investment landscape will continue to expand.»
1Source: Vivid Economics, November 2021.
2Source: BlackRock, Global Business Intelligence, as of 31 December 2021. Based on assets under management and net new business.
3Source: BlackRock, Global Business Intelligence, as of 28 February 2022.
4Source: BlackRock using data from Bloomberg and Wind, as of 31 December 2021.
5Source: Accenture, «Good to grow: The rise of ESG investing in Asia», April 2022.
6Source: Bloomberg, as of 17 June 2022.
7Source: Bloomberg, as of 31 May 2022.
Sunita Subramoniam
APAC Head of Sustainable for ETFs and Index Investments, BlackRock
Georgina Mitchell
iShares Specialist, Asia ex-Japan Wealth Distribution, BlackRock
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