The Rise of Retail: Empowering Asia's ESG Transition
While it is generally accepted that environmental, social, and governance (ESG) investing in Asia lags behind that in the United States and Europe, the region's rapid development has been spectacular.
Take the figure that, over the last five years, US$260 billion has been poured into ESG products in Asia, which is a record amount. This, along with the fact that Asia is expected to drive half of all global consumption growth over the next decade and become home to one out of every two upper-middle-income and above households over that time, makes it clear that this part of the world is crucial to the growth of the global sustainable finance industry. Getting things right in Asia could decide whether or not net-zero and sustainable development goals will be met in the long run.
So, what should industry professionals and policymakers think about most to ensure the ESG trend keeps going? There is still a lot of work to be done to prove the true nature, value, and impact of ESG-linked investment claims, especially since "greenwashing" is getting more attention and investors are expecting more. If we don't make progress on this front, it could hurt people's trust in sustainable investing, which would hurt its growth in the long run.
Technology and regulatory innovation hold the key to overcoming this impediment in the future.
Enabled by Tech
Digitalisation has made it possible for market participants to move forward with their goals for sustainability in ways that were not possible before. Individual investors have never had so much control over their finances or had so much real-time information at their fingertips as they do today. The "democratisation of finance" is well underway and has fundamentally changed asset management in favour of younger people and the "mass market." Many of the innovations that have helped this shift happen over the years, like digital trading apps that don't charge commissions and new low-cost investment vehicles, are here to stay and will play a key role in fostering the growth of a stronger ESG ecosystem.
As Asian individual investors get smarter, their calls for more choices and power will get louder. Broadridge works with some of the most important financial institutions in the region, and it has noticed that customers' expectations are growing in terms of sustainability, personalisation, and openness.
The implications of this for ESG investing go far beyond the products asset managers choose to bring to market to impact the fundamental way the industry enables investors to interact with their investments and have their voices heard. The best example of this for shareholders is making it easier for issuers to get people involved in key ESG initiatives through digital investor communications and better proxy and mobile voting solutions.
But innovation is being held back by real things right now. For example, it is still hard to get to and combine high-quality ESG data. Standardising sustainability metrics, definitions, and disclosures is still a work in progress, and global financial institutions are worried about how to deal with different compliance rules.
Regulatory Innovation and Collaboration
Critical to addressing these hurdles will be encouraging a collaborative regulatory environment that brings cross-sector stakeholders together to share data, best practices and knowledge for capacity building at scale.
The policies that regulators have made so far are promising, both because they are ambitious and because they have tried to meet the goals of different stakeholders to move the ESG transition forward.
Some people say that the current "spaghetti bowl" of ESG regulations, disclosure requirements, and taxonomies makes things very hard for issuers and investors, but it also gives them a chance to talk to each other and work together more effectively. In the short term, the most obvious benefit is access to better primary data through improved disclosures, as well as a common language for interactions between sectors. On the back of this, we expect the pace of change and technological innovation to make sense of this pool of information to accelerate. This will ultimately facilitate better benchmarking, decision-making, and capital flows across the region.
Next in Asia?
The industry might never agree on a single common taxonomy or set of disclosure standards, but there is a growing focus on framework and platform interoperability. Important changes in the ecosystem, like the launch of Singapore's ESGenome, a digital disclosure portal for ESG data that is compatible with reporting in line with globally recognised standards, are important milestones that could have a big effect on the future of ESG innovations.
We are hopeful that Asia will move the global ESG agenda forward by taking many of the right steps. Given its role in the fight against climate change, it must take the lead in many ways to make changes happen.
Source: The Business Times