Despite a challenging macro environment in Asia and around the world leading to outflows in equities and bonds, some sustainable strategies appear to be bucking the trend, according to Jean Ryan, senior vice-president – business development and client services for Asia at KBI Global Investors.
Here she tells ESG Clarity Asia what’s on the regulatory horizon for sustainable investing in Asia, where she sees opportunities in the energy transition and why investment in the space is set to accelerate.
How has interest in the energy transition and sustainable finance space been in the past year given the declines in capital market activity and backlash in ESG seen in 2022?
The macro environment last year and fears of recession globally later this year have contributed to a risk-off environment for investors with massive flows out of equities and bonds last year and continued flows out of equities this year in favour of more liquid and income-generating assets.
What’s interesting though is that our energy transition and sustainable infrastructure strategies bucked that trend – in fact we had our most successful year in 2022 in terms of inflows. This year has also been very strong in terms of raising assets, alongside a very strong pipeline of investor due diligence on the strategies. This is because investors have woken up to the opportunity being presented by the energy transition; the three main themes are clean energy, water and agriculture.
Talk us through KBI’s energy transition strategy and how your portfolio for sustainable finance products is structured?
We’re in the early innings of what will probably be a 30-year transition to renewable strategies from fossil fuel generation and the opportunities for investors are enormous. As a theme it is being adopted much more broadly now, in part because both strategies outperformed the MSCI ACWI last year in a really difficult environment for equity strategies.
Long-term megatrends, including supportive regulation and policy, technical innovation (such as batteries enabling e-mobility) and massive investment spend are being boosted with ongoing cost reductions to renewables and moves by governments to reduce planning and permitting bottlenecks.
Our Energy Transition portfolio of around 50 stocks includes companies focussed on areas such as renewable energy generation; solar equipment; energy efficient technologies for buildings, grid resilience and smart grid technologies, offshore wind, e-mobility and battery storage.
Taking offshore wind as one example, we invest across generators and equipment suppliers, such as turbine manufacturers and vessel carrying companies that are critical to the complex installation process.
Another exciting area is e-mobility. We invest across power semiconductors, a critical part of the electric vehicle (EV) supply chain – in fact EVs use twice as many semiconductors chips as ICE cars. We also invest in EV charging companies and battery storage manufacturers and in EV OEMs on a selective basis.
These megatrends we have identified have been in place for many years, but with the growing momentum to tackle climate change and reduce carbon emissions, as well as energy security concerns, they are more relevant and compelling today than ever before.
How does Asia compare to Europe when it comes to the development of sustainable finance disclosure frameworks?
The focus on sustainable finance been stronger than in Europe, which has been leading the way with its taxonomy that is designed to detail which economic activities support the European Union’s environmental goals and to force investors and companies to disclose how their portfolio and activities measure up against those definitions.
Beyond the taxonomy and the Sustainable Finance Disclosure Regulation, starting this year, all large companies will have to disclose their alignment with the sustainability framework in their annual reports under the European Sustainability Reporting Standards. New rules are also planned for funds that want to include ESG, climate or sustainability in their names. It is expected that these rules will be linked in the proportion of assets under management invested into assets with environmental and social objectives or characteristics.
Although taxonomy adoption is increasing across Asia, including in Malaysia and China, many other Asian taxonomies have not been fully implemented yet, and it is still under consultation in Indonesia, Singapore, Thailand and the Asean bloc. Many local regulators are increasingly involved in international forums and sustainability organisations and the direction of travel is clearly towards broader adoption. So, there is still significant progress to be made on this front.
In Europe, increased taxonomy adoption and fund labelling regulations have benefitted funds that can substantiate their commitment to sustainable and environmental investing principles (in terms of investor flows) and we expect this effect to be replicated across Asian markets as these countries broaden their regulatory framework.
How important is greenwashing in the development of sustainable finance frameworks?
Stamping out greenwashing, whether through a disclosures framework or labelling requirements, is a key consideration for regulators across all major investment centres, including Southeast Asia.
There is a lot of evidence that incorporating ESG considerations into investment decision making is additive to performance. Companies with good ESG characteristics and a focus on sustainability are able to generate higher returns over the longer term and also to reduce ESG risk in portfolios, and the data is there to support the contention that there isn’t a cost to adopting ESG principles.
Encouraging investment into companies with strong sustainability credentials and enforcing higher levels of disclosure around sustainability are of equal importance and support initiatives in these areas.
What’s next for sustainable investing?
Once the appetite for risk returns for equity investors, [sustainable investment] trends will accelerate across institutional and distribution channels.
We have also seen several recent mandates for sustainable infrastructure as opposed to traditional global listed infrastructure in Southeast Asia. These mandates are innovative and forward looking and we think we’ll see more of them.