As large asset owners in Asia-Pacific markets march ahead in implementing environmental, social, and governance (ESG) factors into their investment processes, their expectations of asset managers to go deeper in their ESG implementation practices are also growing, according to Cerulli Associates’ newly released report, Responsible Investing in Asia 2020: On the Cusp of Change. 

While Asian asset owners are looking to issue ESG-specific mandates in some asset classes, they do not view ESG merely from the point of view of issuing mandates. Instead, they are evaluating the depth and holistic implementation of ESG processes by managers. In terms of assessing asset managers based on ESG considerations, asset owners place high importance on the extent of ESG integration along with examples of firm-specific ESG incidents, according to Cerulli’s survey of Asia-Pacific institutional investors.

ESG reporting requirements are also evolving. While one-third of asset owners surveyed said they currently require portfolio-level exposure to other financially material ESG risks—this percentage jumps to more than double (69%) over the next two years. Similarly, asset owners’ expectations of portfolio level exposure to climate risks are increasing, as indicated by 71% of the respondents who require asset managers to report on this aspect over the next 24 months, compared to 31% currently.

Asian investors that have focused on the governance aspect of ESG during their investment analysis have started paying attention to environmental factors. While Australian super funds are leading in assessing climate-related risks, some other major institutional investors in markets such as Hong Kong, Singapore, and Korea are also taking measures to examine the risks of environmental exigencies to their portfolio. Furthermore, some institutional investors in Korea have started assigning points to managers based on how ESG factors are reflected in their policies and processes.

“ESG is still not mandatory in gaining institutional mandates, but its role in the due diligence process is expected to increase in prominence. As ESG investing progresses and asset owners’ expectations of managers on ESG reporting requirements increase, managers will have to demonstrate their capabilities by showing evidence of ESG integration, examples of their actions on specific ESG issues, impact on investments, and the outcomes derived from ESG investments,” said Leena Dagade, associate director.

“Despite the looming challenges in its adoption and the current small proportion of investors’ allocations, ESG represents new product distribution and investment opportunities for managers,” Dagade added.

Since ESG adoption varies by market and investor type, managers can assess the needs of their clients on a case-by-case basis. Some large managers have taken the lead by implementing ESG integration across asset classes, whereas others adopt screening strategies based on client-specific requests.

“While ESG take-up is being seen with large institutional investors, managers that have been leading in this segment can encourage small and mid-sized investors to do likewise by imparting education and explaining how ESG-focused investments can help in ’doing good’ and at the same time in mitigating risks,” said Kean Yung Siau, associate analyst.