Corner Office Views | Q1 2023
Climate Focus in Asia
Partnerships needed to accelerate green investments
- Cerulli’s survey of Asian asset owners shows a smaller allocation toward ESG bonds among respondents: 74% have a maximum of 5% of their assets in green bonds.
- Reasons for smaller allocation to green bonds include uncertainty about the actual use of proceeds raised and lack of investible projects or sufficient investment avenues.
- Regulators, governments, and non-profit organizations have been calling for collaboration between private and public entities to explore investment opportunities emerging from energy transition.
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.
Smaller investment allocations
A full 60% of owners in Asia identify the key responsible investment themes are climate change, clean technology, and renewable energy. Climate has emerged as a key impact investing theme due to regulatory and government initiatives, while social issues, such as quality education, gender equality, reduced inequality, and no poverty feature lower among priorities.
However, Cerulli’s survey of Asian asset owners shows a smaller allocation toward ESG bonds among respondents: 74% have a maximum of 5% of their assets in green bonds. Only about 5% to 9% have more than 5% allocated to green bonds. Encouragingly, only a small group of investors do not have any plans to invest in these bonds. And positively, almost half of the respondents have plans to increase their allocation to these bonds over the next two years.
Cerulli believes there could be various reasons for institutional investors’ lower allocation to bonds. These range from a cautious approach to investing due to hesitancy in exploring new assets and lack of understanding about addressing climate risk, to uncertainty about the actual use of proceeds raised and lack of investible projects or sufficient investment avenues.
The lack of investment avenues is reflected in the GIC’s view. It said it is “very active” in investing in new technology sectors such as renewable energy, battery manufacturing, electricity grid software, green hydrogen, carbon removal, and even nuclear fusion, but at the same time, added that the opportunities are currently relatively small despite the great potential.
Measuring climate metrics and disclosures
Apart from the shortage of investment avenues, many investors in the region lack the know-how and technical expertise required in measuring the carbon footprints of their investment portfolios, in subjecting their portfolios to different climate conditions for risk assessment, or in evaluating the scope of emissions to be included in measuring the carbon footprints of their portfolios. If the measurement of metrics is a challenge, so are disclosures.
Hence, Asian institutional investors are keen to not only gain more of understanding of these technical areas, but also build their capabilities. In November 2021, GIC and Schroders co-developed a framework to measure and integrate avoided emissions into investment and portfolio analysis. In a joint paper, they said avoided emissions are used as “an additional lens by capturing companies’ contribution to emissions reductions through the substitution of high carbon activities with low carbon alternatives, as these are not reflected in their conventional Scope 1, 2 and 3 metrics.” It sees scope for the framework to be improved further and for the analysis to be extended from public to private asset classes.
Cerulli believes that major influential investors in the region should join forces to address the various issues and accelerate investments into climate-transition and green financing investments to meet their net zero pledges. Regulators, governments, and non-profit organizations have been calling for collaboration between private and public entities to explore the investment opportunities emerging from energy transition.
Already, some partnerships are being inked. At the G20 summit in November 2022, the Indonesia Just Energy Transition Partnership was announced, which will see mobilization of US$20 billion over the next three to five years, using a mix of grants, concessional loans, market-rate loans, guarantees, and private investments, to accelerate a just energy transition.
In the same month, the Anthropocene Fixed Income Institute (AFII), a research organization that helps fixed-income investors to drive climate transition, and Singapore-based Climate Smart Ventures, inked a Transition-Southeast Asia (T-SEA) partnership. The initiative will develop financing opportunities for corporates planning to move to more sustainable operations, with an initial focus on the shift from fossil fuels to renewable energy. It will ensure funding through transition and sustainable finance structures in the region, such as sustainability-linked bonds and other labelled debt.
Cerulli’s survey of asset owners also indicates areas for collaboration, with 62% showing interest in partnering with each other for knowledge sharing and creating tools and analytics. Currently, MSCI and Carbon Delta Data are used by 42% of asset owners, followed by S&P and Trucost. Some 57% of asset owners showed interest in collaborating for climate-related investment opportunities. They are also keen to explore partnerships with asset managers in areas such as knowledge sharing and tools and analytics.
You May Also Be Interested In:
- Annual report
- The Cerulli Edge
STRATEGIC CONSULTING AND CUSTOM RESEARCH
Understand where to allocate resources to achieve your objectives. We can help you determine which initiatives are likely to be successful and those that may not achieve the desired effect. In an increasingly competitive market, our objectivity and experience can help you to advance your firm’s unique strengths.