As large asset owners in the region march ahead in adopting ESG factors into their investment processes, their expectations of fund managers to go deeper in their ESG implementation practices are also growing, according to a report by Boston-based research firm Cerulli Associates.

While one-third of asset owners surveyed by Cerulli surveyed said they currently require portfolio-level exposure to other financially materially ESG risks, this percentage jumps to more than double (69%) over the next two years.

In addition, asset owners’ expectations of portfolio level exposure to climate risks are increasing, as 71% of the respondents indicated that they will require asset managers to report on this aspect over the next 24 months, compared to 31% currently, according to the report.

Cerulli explained that institutions 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 of the major asset owners in Hong Kong, Singapore and Korea are starting to take measures to examine environmental risks in their portfolio.

“ESG is still not mandatory in gaining institutional mandates, but its role in the due diligence process is expected to increase in prominence,” Leena Dagade, associate director at Cerulli, said in the report.

“As ESG investing progresses as 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,” she added.