Industry Voice: Why ESG Is Critical in Asian Fixed Income Investing

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Industry Voice: Why ESG Is Critical in Asian Fixed Income Investing

Asia occupies a unique spot at the intersection of sustainability and finance. It is home to 60% of the world's population, two of the world's top three energy-consuming countries, and a growing trillion-dollar credit market.1 At the same time, 99 of the 100 riskiest cities for environmental and climate-related threats are in Asia.2 In recent years, the region's largest economies have announced timelines toward carbon neutrality, measures to reduce greenhouse gas emissions, and investments in cleaner energy sources, electric vehicles, and other green technologies in a bid to stem climate change.

The United Nations estimates that Asia-Pacific requires an additional investment of US$1.5 trillion annually to meet the Sustainable Development Goals by 2030.3 Reflecting the financing gap and the regulatory push, Asia saw a surge in issuance of environmental, social, and governance (ESG)-related bonds in 2021. These bonds offer opportunities for international investors to gain exposure to a new potential alpha source in Asia fixed income. When the Hong Kong government issued US$2.5 billion in green bonds in 2021, European and US investors cornered a third of the total issuance.4

2021: A Record Year for Green, Social, Sustainability, and Sustainability-Linked Bond Issuance in Asia

2021: A Record Year for Green, Social, Sustainability, and Sustainability-Linked Bond Issuance in Asia

Source: JPMorgan as of 30 September 2021. For illustrative purposes only. We are not soliciting or recommending any action based on this material.

This investment environment presents exciting new frontiers. On one hand, capital dedicated toward ESG investments is growing; on the other, opportunities for capital appreciation increase as companies bridge ESG gaps. For now, it is a case of large amounts of money chasing few assets, which could lead to disappointment if investors are not carefully vetting the ESG processes of the underlying businesses they're investing in and the securities selectors they're engaged with.

The integration of ESG factors into investment processes is still relatively new in Asia compared to the US and Europe, given a limited understanding of its benefits and a relative lack of commercial motivation, among other reasons. Yet our experience investing in Asian fixed income for nearly two decades has shown that ESG factors have a measurable impact on outcomes in areas such as credit quality, defaults, and spreads. In times of financial stress, like today, investing with an ESG lens can help fortify portfolios through heightened risk management - and active investing using local expertise and an on-the-ground presence offers the added advantage of a more nuanced approach to identifying risks and opportunities.

 

 

This post is funded by Pinebridge Investments

 

Footnotes

1 Sources: Population: UN Department of Economic and Social Affairs, World Population Prospects 2019; Energy: BP Statistical Review of World Energy 2021; Market Size: JP Morgan, PineBridge as of 30 September 2021.
2 Verisk Maplecroft, "Asian cities in eye of environmental storm - global ranking," May 2021. See: https://www.maplecroft.com/insights/analysis/asian-cities-in-eye-of-environmental-storm-global-ranking/
3 UNESCAP, 2019  https://www.unescap.org/sites/default/d8files/knowledge-products/Economic_Social_Survey%202019.pdf
4 Hong Kong Monetary Authority, 27 January 2021. See: https://www.hkma.gov.hk/eng/news-and-media/press-releases/2021/01/20210127-3/


Disclosure

Investing involves risk, including possible loss of principal. The information presented here-in is for illustrative purposes only and should not be considered reflective of any particular security, strategy, or investment product. It represents a general assessment of the markets at a specific time and is not a guarantee of future performance results or market movement. This material does not constitute investment, financial, legal, tax, or other advice; investment research or a product of any research department; an offer to sell, or the solicitation of an offer to purchase any security or interest in a fund; or a recommendation for any investment product or strategy. PineBridge Investments is not soliciting or recommending any action based on information in this document. Any opinions, projections, or forward-looking statements expressed herein are solely those of the author, may differ from the views or opinions expressed by other areas of PineBridge Investments, and are only for general informational purposes as of the date indicated. Views may be based on third-party data that has not been independently verified. PineBridge Investments does not approve of or endorse any re-publication or sharing of this material. You are solely responsible for deciding whether any investment product or strategy is appropriate for you based upon your investment goals, financial situation and tolerance for risk.

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