Corner Office Views | Q1 2022

Striving for Low-Carbon Investing in Asia

Collaborating to address climate risks will be key

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Key Points

  • Given the complexity of assessing climate risks, even sophisticated asset owners look forward to collaborating with managers to gain knowledge about addressing climate risks and decarbonizing portfolios.
  • This collaboration will include technical details of carbon data measurements, types of assets to be assessed, and types of emissions to be included, among others.
  • Among both managers and asset owners surveyed, difficulty in implementing different regulations in various regions/markets, complexities in assessing data and risks across different asset classes, and lack of standardized data sets are the top three challenges when evaluating companies for climate risks.
  • Despite these challenges, large asset owners and insurers have taken steps to invest in low-carbon investment strategies. Investors are looking to increase their investments in decarbonization themes, such as renewable energy and low-carbon sectors.

Authored by

Leena Dagade

Leena Dagade

Associate Director

Bio →

Leena Dagade

Leena Dagade

Associate Director

Based in Cerulli's Singapore office, Leena is responsible for retail research in the Asian asset management industry. She is the lead analyst for the Environmental, Social, and Governance (ESG) research practice in Asia and contributes to Asian institutional reports, Cerulli Edge publications, and consulting projects.  

Prior to joining Cerulli, she was a deputy editor for an online financial publishing firm, covering the asset and wealth management industry in Asia. Previously, she worked with a real-time financial news and market data firm and an asset management company. 

Full biography here.

Climate conversations are in the spotlight

The 26th annual summit of the United Nations’ “Conference of the Parties,” or COP26, where countries agreed to reduce carbon dioxide emissions, intensified discussions around reducing carbon emissions. Major Asian countries, such as Japan and Korea, have committed to net zero emission targets by 2050, while China and India aim to be climate neutral by 2060 and 2070, respectively.

Climate concerns have indeed come to the fore, as reflected in Cerulli’s survey of asset owners and asset managers. Three-fifths of asset owners and all managers said they evaluate carbon emissions of their investee companies. Among asset owners, a majority of insurers (81%) said they consider carbon emissions of portfolio companies. This is not surprising, as insurance companies hold long-dated assets, and could therefore be susceptible to climate risk.

While some asset owners have committed to net zero emission targets and some managers have set some carbon emission targets, given the novelty of the topic and technical details of measuring climate risk, various segments of the industry will need to join forces to share knowledge and learning, and come up with collective actions in order to reach their climate goals.


Setting targets and investing in climate solutions

Asia-Pacific asset owners are considering various initiatives to insulate their portfolios from externalities and transitioning to net zero. These include setting carbon targets, measuring carbon emissions of investment portfolios and conducting scenario analysis to assess climate risks, investing in climate transition-related sectors, engaging with companies, and divesting from fossil fuels. However, as with the general adoption of ESG, the transition to net zero or conducting scenario analysis is led by sophisticated asset owners. These includes Japan’s Government Pension Investment Fund, Singapore’s GIC, and the Monetary Authority of Singapore (MAS), among others.

Only 35% of asset owners plan to set science-based targets, while this was 75% for asset manager respondents, thus indicating a lack of technical knowledge on this topic among asset owners.

For example, GIC has stress-tested its investment portfolio under different climate scenarios to assess the impact at asset class and security levels. It started to measure its global corporate carbon footprint in 2019, and has developed a dashboard to track and manage its carbon footprint. Temasek incorporates climate scenario analysis, alongside other macroeconomic or geopolitical events, in its Temasek Geometric Expected Return Model (T-GEM), which uses a scenario-based approach to simulate 20-year long-term expected returns. It continuously tracks and manages climate-related risks to its portfolio, including those at the individual asset level.

Cerulli’s survey of asset owners show about 61% of the respondents plan to set interim targets to reduce carbon emissions by 2030, while slightly less than half
plan to make investments supporting the transition to a carbon-neutral economy.

As for asset managers, Cerulli’s survey shows that 90% have plans to set interim carbon emission targets by 2030, while 89% have plans to offer more climate-focused investment products to their clients.

An observation worth highlighting is that only 35% of asset owners plan to set science-based targets, while this was 75% for asset manager respondents, thus indicating a lack of technical knowledge on this topic among asset owners. Given the complexity of assessing climate risks, even sophisticated asset owners could learn from managers about the various aspects of addressing climate risks and decarbonizing portfolios, which include technical details of carbon data measurements, types of assets to be assessed, and types of emissions to be included. Despite these challenges, large asset owners and insurers have implemented initiatives to invest in low-carbon investment strategies.

Engaging with investee companies on cutting emissions, divesting from fossil fuels

In June 2021, Asia Investor Group on Climate Change (AIGCC) launched a new engagement program backed by 13 institutional investors and stewardship service providers (including GIC, Cathay Financial Holdings, and BNP Paribas Asset Management), to engage with Asia’s “systemically important” electricity utilities on cutting emissions, strengthening disclosure, and improving governance of climate-related risks.

These investors will collaboratively engage with five utility companies or “focus companies”—China Resources Power Holdings (China), CLP Holdings (Hong Kong), Chubu Electric Power Co. (Japan), Electric Power Development Co. (J-POWER) (Japan), and Tenaga Nasional Berhad (Malaysia)—which collectively emitted 285 million tonnes of carbon dioxide in 2019, equivalent to Spain’s emissions, according to AIGCC.

Asia-Pacific ex-Japan Asset Owners’ Expectations of External Managers in Divesting from High-Carbon Sectors, 2021

Source: Cerulli Associates | Analyst Note: Others include endowments, foundations, and healthcare institutions.

Asset owners and asset managers generally seek to engage with investee companies, instead of divesting from them. However, engagement can be conducted only to a certain extent, and if these activities do not result in positive outcomes or action from investee companies, then the chances of eliminating the company cannot be ruled out. According to Cerulli’s survey, some 69% of asset owners would like external asset managers to divest from high carbon-emission sectors, while half of the managers surveyed indicated that they plan to divest from such sectors (see Exhibits 1 and 2).

Investors such as the Korea Teachers’ Pension Fund (KTPF), National Pension Service (NPS), and Australian superannuation funds, have already announced plans to divest from coal projects. Insurers including AIA, DB Insurance, Hyundai Marine & Fire Insurance, and Hana Insurance have also pledged to halt their participation in financing projects for local and foreign coal power plants.

Asia ex-Japan Asset Managers on Divestments from High-Carbon Sectors, 2021

Source: Cerulli Associates

However, it might not be easy to decarbonize all sectors in the portfolio. Aggressively abandoning some fossil fuel assets could also have social implications as well as impact portfolio assets and limit the investment universe. For instance, while 56% of asset owners would prefer to engage with the company, about 46% cite the shrinking investment universe as the reason for not eliminating fossil fuel companies from portfolios, and 41% believe divestments could negatively impact their returns. Among managers, engagement with companies was cited as the key reason for not divesting from fossil fuel companies by managers.

Addressing the data challenge

Among both managers and asset owners surveyed, difficulties in complying with different regulations in various regions or markets, complexities in assessing data and risks across different asset classes, and lack of standardized data sets are the top three challenges in evaluating companies for climate risks.

Hence, the setting up of the new International Sustainability Standards Board in November 2021 is expected to support the industry establishing an international baseline for climate risk reporting, which will be a significant development in enabling the comparability of data, at a time when regulators in markets such as Hong Kong and Singapore have published environmental risk management guidelines for managers.

Asset owners also face the challenges of limited understanding of climate-related data, lack of awareness about using data analytics and tools, and difficulty in setting carbon emission targets to a moderate degree, while managers have rated these factors among the least of their challenges.

Cerulli believes managers with established practices and expertise in analyzing and assessing climate-related data have opportunities to work with asset owners to address some of these issues. This is reinforced by our survey findings. Engaging with investee companies on energy transition and sharing engagement results, as well as sharing of research, data, and analytics on climate-related investment aspects, are among the top three expectations of asset owners (see Exhibit 3).

Asia-Pacific ex-Japan Asset Owners’ Key Expectations from External Managers on Environmental Aspects, 2021

Source: Cerulli Associates

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