Asia-Pacific investors are expected to accelerate the integration of sustainable investing allocations into their portfolios over the next five years, but allocation drivers are changing, and so are the ways investors want to access sustainability themes, according to a recent survey.
As well, investment advisers in the region are changing their environmental, social and governance (ESG) focus from the traditional one that favours the environment to one that increasingly prioritizes social issues, led by accumulating evidence on the financial materiality of these factors, reveals J.P. Morgan Asset Management’s Future Focus Survey, which surveyed a range of Asia-Pacific investment advisers.
Understanding environmental challenges and addressing them through portfolio decision-making has become common among Asia-Pacific investment advisers to date. When asked further about what is driving asset allocation decisions, instead of solely driven by client demand, the survey reaffirms that advisers are primarily aiming to achieve greater diversification of portfolios (41%) and searching for companies that can create long-term value (41%).
As sustainable investing continues to mature, investors are also exploring new avenues for opportunities. While equities will remain the dominant feature of investment portfolios, the survey reveals that investors are likely to increase their allocation in alternative strategies and multi-asset portfolios within five years.
When it comes to regional allocations, Asia-Pacific investors have traditionally favoured destinations outside of their region, such as the US, Europe and the UK, but the survey notes that investors are shifting portfolio allocation towards China, with 40% of respondents showing interest in doing so in five years’ time, followed by other destinations like emerging markets (18%) and Japan (15%).
In terms of hurdles frustrating efforts around sustainable investing, there is almost universal acknowledgment that data is insufficiently meaningful, standardized or available. Almost half (47%) of respondents stated that end-investors were unsure about where to source the best information, and an even greater proportion (51%) state that investors are confused about which metrics to factor into investment decisions.
“Although sustainable investing in Asia-Pacific is still at a transitional phase, the region could pull ahead of others in its adoption of sustainable investing practices with governments and regulators in the region rapidly introducing a range of sustainability commitments and requirements,” says Tomomi Shimada, lead Asia-Pacific sustainable investing strategist at J.P. Morgan Asset Management. “There are also tremendous sustainable investing opportunities in Asia-Pacific.
“[And] many investors understand there doesn’t have to be a trade-off between ESG and financial returns. Rather, by integrating ESG factors alongside other financially material factors, we can identify new opportunities while managing risks that could negatively affect portfolio returns.“