Asia must catch up on ESG investing

US President Joe Biden has rejected Republican plans to prevent American pension-fund managers from basing investment decisions on factors such as climate change, in the first veto of his presidency.

“I just signed this veto because the legislation passed by the Congress would put at risk the retirement savings of individuals across the country,” Biden said in a video posted on Twitter.

The bill cleared the US Congress, when the Senate voted 50-46 to adopt a measure to overturn a Labor Department rule making it easier for fund managers to consider environmental, social and corporate governance (ESG) factors for investments and shareholder rights decisions.

Meanwhile, financial firms in the UK and the European Union have “remained under significant pressure” to comply with ESG rules over the past six months, KPMG’s Regulatory Barometer recently revealed.

While there remain difficulties in the US in establishing ESG regulations versus the progress made in Europe, the two global regions are both heading toward greater standardization.

The regulatory push in the area of ESG is being driven by soaring demand by institutional and retail investors. 

ESG investments have become increasingly popular in the past decade as investors look for ways to generate decent returns while supporting companies that prioritize sustainable practices and social responsibility.

However, Asia, on almost all counts, lags behind the rest of the world in terms of demand for ESG investing.

In order to catch up, there’s a pressing need to stoke demand with greater, wider awareness about ESG investments and their importance in creating a sustainable future. 

Governments and companies need to work together, in a “joined-up” thinking approach, to promote the benefits of ESG investments and to educate the public about their positive impact.

Opportunities for investors

The key messaging that they must include is that ESG can provide significant opportunities for investors, companies, and for society by encouraging investing in long-term performance, reducing risk, driving positive change, increasing transparency, improving brand reputation, and attracting younger investors.

Governments across the region will also need to step up and develop regulations and standards that encourage companies to adopt sustainable practices. 

These should focus around reporting requirements and incentives for firms that prioritize ESG factors. 

Ideally, there should be a region-wide framework to provide the confidence and clarity that investors require. The lack of standardized ESG metrics and reporting frameworks across Asia makes it harder for investors to compare and assess the performance of different companies and funds in different jurisdictions.

Providers in Asia also need to increase the availability of investment opportunities that prioritize ESG factors. The limited range of ESG products available in some parts of Asia makes it difficult for investors to find suitable options.

Although North America and Europe are streets ahead of Asia in terms of ESG investing, more still needs to be done on a global scale to promote the profits-with-purpose concept.

It’s clear that governments alone cannot combat the worst effects of human-triggered climate change.

Governments are best positioned to develop, implement and manage policy, incentives, standards, metrics and regulations. And yes, they must also provide top-level funding. 

But because of the tens of trillions likely to be needed for disaster prevention and mitigation, there will remain a major funding gap if we rely solely on the public sector.

This is especially true as governments are still battling with the unprecedented financial fallout of the Covid pandemic, for which no country was prepared and which upended economies globally.

Therefore, it is essential to enable, unlock and mobilize private capital as a matter of urgency.

To do this, we need global cooperation among financial advisories, insurance firms, banks, wealth and asset managers, investment companies, fintech groups, banks and auditors, among others, to help unlock and mobilize the trillions of dollars of private finance that is urgently required. Without this, the level of funds required will simply not be there.

Climate change remains the most serious risk multiplier to our planet, to our communities, and to our way of life.

Failing to understand the magnitude of it now is going to have catastrophic, irreversible consequences later. Urgent private finance inflows are essential. 

Asia is home to some of the world’s most pressing environmental and social challenges, including climate change, air pollution, and inequality. By increasing demand for ESG investments, Asia can encourage companies to adopt more sustainable and socially responsible business practices, and help address these global challenges.

Nigel Green is founder and CEO of deVere Group. Follow him on Twitter @nigeljgreen.