APAC asset owner approaches to sustainable and climate investing

Invesco’s latest Global Sovereign Asset Management Study 2024 (IGSAMS 2024) highlights increasing sophistication amongst asset owners in applying ESG in their investment approaches. Understanding how asset owners are approaching sustainable investing provides a lens to learn ESG best practices, discover emerging trends and priorities, and identify potential investment opportunities. The research looks at how 52 APAC asset owners across sovereign wealth funds, pensions and insurance companies with over US $15 trillion in assets under management (which we refer to as APAC asset owners) approach ESG and climate investing based on publicly available policies and sustainability reports. The APAC asset owners are based in Greater China (including Hong Kong), Japan, South Korea, Singapore, Malaysia, Indonesia, Australia and New Zealand.

1] ESG approach: Foundations are in place among most APAC asset owners

More than 75% of APAC asset owners have adopted ESG policies and have a dedicated in-house ESG team. Many of these policies help the asset owners articulate the role of ESG in their investment process and the key approaches they are using including:

• Integration: More than 70% of APAC asset owners consider financially material ESG opportunities and risks. Some asset owners also have a formulated assessment criteria of investment managers’ ESG capabilities which typically includes their integration and stewardship approaches, data and framework capabilities and broader industry commitments and initiatives.?
• Stewardship: More than 70% of APAC asset owners have also detailed their approaches to stewardship including both engagements and proxy voting. Many articulate the importance of utilizing ownership positions and rights to protect and enhance long-term investment returns.
• Exclusions: Select APAC asset owners also specify investment exclusions in their policies, driven both when looking at higher investment risk areas and in accordance with internationally accepted norms.
• Dedicated ESG team: Many APAC asset owners have also hired and built out dedicated in-house ESG investment teams. Interestingly the roles and functions of these teams differ across asset owners - for some the focus is on developing ESG integration frameworks and capabilities, for others its fully focused on stewardship and engagement, while others might be more focused on ESG investment research and portfolio construction or fund selection.

2] Capital deployment: Dedicated ESG and impact investments

As part of their broader ESG investment strategy, more than 70% of APAC asset owners have made investments into either ESG-related strategies or issuers. Of those that reported ESG AUM data, most have allocated on average between 1 to 10% of their total AUM into ESG-related investments. Such investments could include:

• Green and sustainable labelled bonds: Investments made as part of their broader fixed income strategies that allows specific targeting of use of proceeds and project areas aligned to the asset owners’ priorities.
• Thematic mandates: By far the most common approach, many APAC asset owners have previously issued ESG investment mandates including ESG leadership or positive screening strategies as well as climate-related thematic strategies.
• ESG index: Some APAC asset owners have also taken an index-based approach to ESG investment, formulating a more systematic approach of constructing ESG indexes based on different sustainability perimeters.
• Impact investing: Another interesting trend we have observed is the growth in impact investing as a deployment asset class amongst asset owners. The focus of these strategies is often on intentionality (how investments lead to real world outcomes), investor contribution (impact resulting from investment or investor involvement), and on impact measurement (monitoring of intended outcomes).?

3] Climate, net zero and transition: Spectrum of approaches to manage climate risks and invest in climate themes

70% of IGSAMS 2024 respondents cited climate impact and transition risks as key risks for the global economy over the next decade, reflective of climate investment initiatives adopted by APAC asset owners which include:

- Targets: More than 50% of APAC asset owners have set targets ranging from longer-term net zero or carbon neutrality targets to near-term reduction targets such as reduction of emissions intensity. Average targets tend to be within ranges of a 30 to 50% reduction relative to baseline years of either 2019 or 2020.

- Climate risk integration and assessment: >1/3 APAC asset owners undertake risk integration including:

• Scenario analysis: Understanding longer-term impact on portfolio valuation under different climate scenarios considering price elasticity, costs pass-through and Scope 3 emissions.
• Shadow carbon price: Applying hypothetical costs for each ton of carbon emitted and evaluating extent of carbon liability if carbon taxes are implemented.?
• Physical risks assessment: Examining exposure to both physical acute and chronic climate risks and the relevant impact on a company’s physical assets, supply chains and operations.?

- Stewardship and engagement: 63% of global asset owner respondents from IGSAMS 2024 identify engagements as part of their approach to climate investing. Key components of an engagement capability include:

• Prioritization: Some asset owners identify the top contributors to portfolio emissions (on average asset owners target the issuers contributing to 50 to 80% of portfolio emissions).?
• Engagement topics: This broadly falls into categories of improving disclosures (including aligning to global standards and bodies like International Sustainability Standards Board, Task Force on Climate-Related Financial Disclosures, Carbon Disclosure Project), setting targets (such as having Science Based Targets Initiative validation), governance alignment (such as board and senior management oversight and compensation alignment) and transition plans and decarbonization initiatives (including capital allocation plans and progress on green revenues, low-carbon products or other operational improvements).?
• Monitoring and tracking: Monitoring of the engagement progress over time including tracking key items raised against plans announced or milestones achieved.

- Climate investments allocation: >50% Asia Asset Owners have set aside investments into climate related themes and strategies including:

• Climate indices: Climate indices help asset owners to tilt portfolios towards decarbonization overtime while minimizing tracking error and portfolio diversification. Approaches include adopting existing industry recognized indices like Paris-aligned benchmarks to having proprietary construction using balancing forward-looking indicators like expected emissions reductions and green revenues alongside factors like liquidity and market capitalization.
• Climate Solutions: Investments in this space are often aligned to taxonomies or standards defining technologies and business activities that contribute to emissions reduction. This also aligns to the Asia Investor Group on Climate Change’s research which shows that an increasing number of Asian asset owners have set targets for climate solutions, and more are actively considering doing so in the coming year.
• Transition Investing: We expect multiple sectors (particularly high-emitting sectors) to be impacted by energy transition globally, creating capital and financing needs for transition. Some asset owners have started to identify opportunities in the broader theme of transitioning brown to green assets in addition to just investing in climate solutions.

- Advocacy: Select APAC asset owners also recognize policy as a critical enabler to accelerating energy transition. Engaging with policymakers whether on disclosures or regulatory consultations or in highlighting sectoral financing needs can help asset owners shape the systems in which they operate and invest in, leading to better financial outcomes over time.

Capital allocators: Evolving the sustainable investing landscape for the future

As mentioned in IGSAMS 2024, asset owners globally are enhancing their sustainable investing capabilities. As we’ve observed with APAC asset owners, the approaches to sustainable investing have broadened over time and serve as helpful best practices for the wider asset management industry. We look forward to continually learning and studying from these capital allocators as they invest in the broader energy transition.??

The above is a summary of Invesco’s research on APAC Asset Owners approaches to ESG and climate investing. For more information, refer to https://www.invesco.com/apac/en/institutional/insights/esg/apac-asset-owner-approaches-esg-climate-investing.html?