The ESG Phenomenon - Cerulli Associates

Editorial Staff

18 December 2020

Environmental, social and governance (ESG) tests will be more widely used in the due diligence checks that Asia-Pacific investors make in future, and are already rising in importance, a study from Cerulli Associates says.

“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,” Leena Dagade, associate director, said.

The comments come in a new report, entitled Responsible Investing in Asia 2020: On the Cusp of Change.

Cerulli said that a third of asset owners it has surveyed currently require portfolio-level exposure to other financially material ESG risks - this percentage jumps to more than double (69 per cent) over the next two years. Similarly, asset owners’ expectations of portfolio level exposure to climate risks are increasing, as indicated by 71 per cent of the respondents who require asset managers to report on this aspect over the next 24 months, compared with 31 per cent 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, the report said.

“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,” Leena Dagade, associate director, said.