Sustainability in Asset Management in Asia: An Institutional Investor Perspective

Geopolitical tensions, the growing middle class in Asia, the idea of China+1 and the increasing appetite for private investments are reshaping Asia’s asset management industry. Amid this, sustainability is increasingly becoming an integral part of the industry, attributed to commitments by governments, regulatory initiatives, and increasing acceptance of climate change as a risk and opportunity. As an economic powerhouse contributing over 58% of worldwide carbon emissions, the region’s asset managers will play a crucial role in achieving the global goal of achieving net zero. 

However, Asia-based sustainable funds represent only 3% of globally managed funds managed. According to the International Monetary Fund (IMF), Asia’s emerging market needs US$1.1 trillion annually for climate mitigation and adaptation but only receives US$330 billion. This massive gap creates opportunities and substantial challenges for asset managers and owners, underscoring the need for nuanced strategies tailored to the region’s unique economic and environmental conditions.

What is going well

Most Asian investors have publicly recognised climate change as a material risk and opportunity. According to an Asian Investor Group on Climate Change (AIGCC) survey, 70% of investors recognise this as driven by regulatory requirements and expectation of better risk-adjusted returns. They engage with companies and incentivise them with credible transition plans, which indicates a positive signal. 

There are plans to develop comprehensive climate transition plans and interest to align investments with a 1.5-degree Celsius trajectory. According to Invesco, more than 50% of asset owners have some target of reducing emissions intensity. The survey suggests that 1/3rd of Asia-Pacific asset owners integrate climate risk, including scenario analysis, shadow carbon price and physical risk assessment, into their risk management practices. 

Where they are lagging

Asset managers in the region operate with limited mandates for low-carbon investments, lagging their US and European counterparts in responsible investing practices. A WWF survey finds Asia-based managers struggling with environmental and social risk management and disclosure, primarily due to insufficient incentives and capacity constraints. Further complicating the situation, most environmental, social and governance (ESG) funds prioritise technology and finance companies over crucial climate transition technologies. This is because of the naturally high ESG ratings of the former. This skewed investment pattern undermines the fundamental goal of supporting the economy’s transition to net zero.

Investment challenges and risk considerations

The lack of standardised metrics and reporting mechanisms hampers accurate risk evaluation, affecting investment decisions and policy effectiveness. This information gap particularly impacts Asia’s emerging economies, where data quality and availability often fall short of institutional investor requirements.

For institutional investors, these structural challenges manifest in several ways. The persistence of fossil fuel subsidies (US$579.7 billion in 2022) distorts market signals and affects investment decisions. Credit quality concerns and limited market liquidity create additional barriers to institutional investor participation, particularly in emerging markets.

Emerging institutional capital solutions

Recent developments at the 29th Conference of Parties (COP29) in Baku indicate evolving institutional approaches to Asian climate finance. The Asian Development Bank’s commitment to invest an additional US$7.2 billion in climate-related projects backed by US and Japanese sovereign loan guarantees, forms part of multilateral development banks’ broader initiative to increase climate-related lending to US$120 billion annually for developing countries.

At COP29, the Monetary Authority of Singapore shared progress on its US$5 billion initiative, originally launched at COP28 in Dubai, to drive sustainable infrastructure. In the next phase, the Industrial Transformation Infrastructure Debt programme will partner with the International Finance Corporation, Mitsubishi UFJ Financial Group, Nippon Export and Investment Insurance, AIA Group, and BlackRock. 

The market has also seen increased activity from global asset managers, with Actis closing its dedicated Asia climate fund, the strategic merger of Global Infrastructure Partners and BlackRock potentially expanding institutional investment capacity in Asian sustainable infrastructure. 

Strategic considerations and future outlook

Several factors will shape institutional participation in Asian sustainable finance. The developing regional taxonomies and enhanced disclosure requirements should improve investment analysis capabilities and market transparency. Continued development of local currency bond markets, credit enhancement mechanisms, and appropriate mechanisms to price the climate risk (via effective carbon markets or carbon taxes) will be crucial for expanding institutional participation. At the same time, innovation in financial structures and blended finance solutions will remain essential for bridging the gap between institutional requirements and regional financing needs.

This article was first published in Funds Global Asia.