A majority of institutions in Asia-Pacific have incorporated ESG considerations into investment decision-making processes, indicating a growing realisation of the need for ESG-based investing, according to a report by Boston-based research firm Cerulli Associates.

Around two-thirds of asset owners surveyed by the firm indicated that they have an investment policy statement specifying ESG priorities and principles. It added that 48% of them have also built their own ESG teams.

Cerulli noted that the move toward ESG investing is still being led by the large institutions, especially in Australia and Hong Kong, but they are expected to influence the behaviour of small and mid-sized institutions in the coming years.

OPPORTUNITIES FOR MANAGERS

While institutions are starting to build their ESG capabilities, Cerulli noted that they are still expected to use asset managers’ ESG expertise.

Around three-quarters of institutions look for external managers’ expertise to acquire ESG knowledge, with 70% of pension plans looking to build their capabilities over the next three years – a finding that managers should take note of to seize potential opportunities, the report said.

When outsourcing portfolio management to external managers, integration of ESG factors into investment processes is currently not mandatory for two-thirds of asset owner respondents, and Cerulli’s discussions with the industry show that mid- and small-sized institutions have been slow to embrace the concept.

However, a significant majority of respondents to Cerulli’s survey deem the ESG aspect as either “very important” or “moderately important” when hiring managers. Close to half (48%) of institutions indicated that the ESG aspect is “very important” when hiring managers, while another 48% say it is “moderately important.

“Against the backdrop of Covid-19 and environmental calamities, along with the strong push from policymakers, ESG-based investing is expected to evolve at a faster rate,” Leena Dagada, associate director at Cerulli, said in the report.

“As awareness of the concept rises, investors are expected to take cognizance of not only material financial risks to their investment portfolio, but also external risks such as environmental and social factors that could pose risks to business operations, weighting on financials and impacting investment returns.

“Hence, it is necessary for managers to stay relevant by building ESG teams and investment capabilities to grab a share of the institutional business.”