7 Dec 2023
Travis Tucker，CFA
HSBC Asset Management Research & Insights Senior Manager
Geoffrey Lunt
HSBC Asset Management, Head of Asia Investment Specialists
Learning About ESG is an educational series that connects environmental, social and governance topics with investing.
Join us each issue to see how global developments can have implications for investors. The better we understand ESG, the bigger the role it can play in our everyday lives – and investment portfolios – contributing to a better world.
The scarcity of available ESG investment products in the region acts as a deterrent to a broader audience of investors, limiting their ability to invest in line with sustainable principles. The fragmentation of ESG data and disclosure practices across Asia further compounds the challenges, with a clear distinction between developed and emerging markets in the region. In particular, financial hubs like Singapore and Hong Kong are making strides toward aligning with European regulatory and corporate disclosure standards.
The absence of consistent company disclosures in emerging Asia poses a significant hurdle to ESG adoption. Due to a lack of standardised rules across countries, inconsistencies impede investors' ability to assess ESG factors. In this context, regulators in Asia have a crucial role to play in introducing consistent policies.
Asia faces diverse yet significant sustainability-related risks. For instance, the region is highly vulnerable to physical risks induced by climate change. However, much of developing Asia currently prioritises economic growth heavily reliant on natural resources and carbon-intensive industries, such as manufacturing – primarily due to outsourcing from developed markets. This results in a continually expanding carbon footprint that hinders their transition to a low-carbon economy, as shown in the chart below.
There’s a clear need to drive sustainable economic development over the long term, supporting the expectation for greater adoption of ESG practices and disclosure in the coming years.
Despite the substantial challenges faced in Asia, there are two main reasons for optimism: a growing demand for responsible investment opportunities and increasing regulatory support. This is evidenced by a twofold increase in the number of ESG policies from 2016 to 2021.[@progressing-esg-adoption-in-asia-1]
Importantly, bond markets offer more direct influence over the allocation of capital, compared to equity markets where investors are trading secondary securities. This, coupled with the massive need for funding of sustainable projects, has contributed to the remarkable growth of the sustainable bond market. Following a decline in issuance since the beginning of 2022, owing to rising interest rates and heightened market volatility, the market in Asia exhibited a robust recovery in the first half of this year.
While green bonds continue to dominate, comprising around 66% of bonds focused on ESG priorities, there has been a notable surge in social and sustainability bonds as well.[@progressing-esg-adoption-in-asia-3] The scale of funding required for Asia’s transition to a net zero economy, estimated at around USD30 trillion by 2050, supports expectations for significant growth ahead in sustainable bond issuance.
Beyond the expansion of sustainable bonds, the growth in ESG products in Asia is being catalysed by emerging ESG-fund labelling requirements. These requirements mandate that asset managers disclose how ESG factors are integrated into the investment process. Tighter regulations for corporate-level ESG disclosures and product-level transparency can greatly enhance corporate governance and market stability, while providing investors with better information to mitigate risks. In fact, companies in Asia that are aligned with the EU taxonomy have expanded their sector relative price premiums to 55% versus earnings, surpassing the global average of 37%.[@progressing-esg-adoption-in-asia-4] Moreover, there has been increasing support in Asia for disclosures recommended by the Task Force on Climate Related Financial Disclosures, with almost half of 3,400 global supporters being Asian organisations.[@progressing-esg-adoption-in-asia-5]
In fast-growing India, whose development is increasingly attracting international investors, the Securities and Exchange Board has mandated Business Responsibility and Sustainability Reporting (BRSR) for listed companies to disclose ESG risks. These steps are clear indications of the progress being made in ESG disclosure and transparency in the region.
Proceeds of these sovereign green bonds are channelled towards investments in two critical areas: renewable energy and the electrification of transportation systems. These sectors are of immense significance, accounting for approximately 41% of India's greenhouse gas emissions in 2019 and projected to contribute two-thirds of emissions by 2050.[@progressing-esg-adoption-in-asia-6] This signifies the rising importance of green bond issuances in India and elsewhere, and their direct impact on long-term sustainability.
Such notable developments are occurring alongside growing attention on India's extensive USD1 trillion government debt market, following its inclusion in J.P. Morgan's benchmark emerging markets government bond indices. This inclusion will deepen the sovereign bond market in India, with a substantial influx of foreign capital estimated at around USD25 billion, and setting the stage for a ramping up of bond issuance to fund future development.
On a broader scale, the deepening bond markets in Asia bode well for addressing long-term sustainability goals. Private capital will play a significant role in both economic development and the region’s energy transition. Alignment with international standards, improved governance and enhanced disclosure practices will encourage capital flows that support sustainable development.
Given the benefits of ESG integration within Asia – notably, improved investment decisions as a result of better transparency and risk mitigation – ESG disclosure progress should only make the region more appealing to global investors pursuing the opportunity of higher yields amidst stable and deepening credit markets. Professional asset managers can assist through investment processes that integrate ESG considerations. This includes assessing ESG risks, carrying out enhanced due diligence of higher risk issuers and actively engaging with companies to address risks and achieve positive outcomes.
ESG: A set of Environmental, Social and Governance criteria that investors can apply to analyse and identify material risks and growth opportunities in investments.
EU Taxonomy: Classification system that defines criteria for economic activities that are aligned with a net zero trajectory by 2050 and the bloc’s broader environmental goals.
Sustainable Bonds: Used to finance or re-finance a combination of green and social projects or activities.
This document or video is prepared by The Hongkong and Shanghai Banking Corporation Limited (‘HBAP’), 1 Queen’s Road Central, Hong Kong. HBAP is incorporated in Hong Kong and is part of the HSBC Group. This document or video is distributed and/or made available, HSBC Bank (China) Company Limited, HSBC Bank (Singapore) Limited, HSBC Bank Middle East Limited (UAE), HSBC UK Bank Plc, HSBC Bank Malaysia Berhad (198401015221 (127776-V))/HSBC Amanah Malaysia Berhad (20080100642 1 (807705-X)), HSBC Bank (Taiwan) Limited, HSBC Bank plc, Jersey Branch, HSBC Bank plc, Guernsey Branch, HSBC Bank plc in the Isle of Man, HSBC Continental Europe, Greece, The Hongkong and Shanghai Banking Corporation Limited, India (HSBC India), HSBC Bank (Vietnam) Limited, PT Bank HSBC Indonesia (HBID), HSBC Bank (Uruguay) S.A. (HSBC Uruguay is authorised and oversought by Banco Central del Uruguay), HBAP Sri Lanka Branch, The Hongkong and Shanghai Banking Corporation Limited – Philippine Branch, HSBC Investment and Insurance Brokerage, Philippines Inc, and HSBC FinTech Services (Shanghai) Company Limited and HSBC Mexico, S.A. Multiple Banking Institution HSBC Financial Group (collectively, the “Distributors”) to their respective clients. This document or video is for general circulation and information purposes only.
The contents of this document or video may not be reproduced or further distributed to any person or entity, whether in whole or in part, for any purpose. This document or video must not be distributed in any jurisdiction where its distribution is unlawful. All non-authorised reproduction or use of this document or video will be the responsibility of the user and may lead to legal proceedings. The material contained in this document or video is for general information purposes only and does not constitute investment research or advice or a recommendation to buy or sell investments. Some of the statements contained in this document or video may be considered forward looking statements which provide current expectations or forecasts of future events. Such forward looking statements are not guarantees of future performance or events and involve risks and uncertainties. Actual results may differ materially from those described in such forward-looking statements as a result of various factors. HBAP and the Distributors do not undertake any obligation to update the forward-looking statements contained herein, or to update the reasons why actual results could differ from those projected in the forward-looking statements. This document or video has no contractual value and is not by any means intended as a solicitation, nor a recommendation for the purchase or sale of any financial instrument in any jurisdiction in which such an offer is not lawful. The views and opinions expressed are based on the HSBC Global Investment Committee at the time of preparation and are subject to change at any time. These views may not necessarily indicate HSBC Asset Management‘s current portfolios’ composition. Individual portfolios managed by HSBC Asset Management primarily reflect individual clients’ objectives, risk preferences, time horizon, and market liquidity.
The value of investments and the income from them can go down as well as up and investors may not get back the amount originally invested. Past performance contained in this document or video is not a reliable indicator of future performance whilst any forecasts, projections and simulations contained herein should not be relied upon as an indication of future results. Where overseas investments are held the rate of currency exchange may cause the value of such investments to go down as well as up. Investments in emerging markets are by their nature higher risk and potentially more volatile than those inherent in some established markets. Economies in emerging markets generally are heavily dependent upon international trade and, accordingly, have been and may continue to be affected adversely by trade barriers, exchange controls, managed adjustments in relative currency values and other protectionist measures imposed or negotiated by the countries with which they trade. These economies also have been and may continue to be affected adversely by economic conditions in the countries in which they trade. Investments are subject to market risks, read all investment related documents carefully.
This document or video provides a high-level overview of the recent economic environment and has been prepared for information purposes only. The views presented are those of HBAP and are based on HBAP’s global views and may not necessarily align with the Distributors’ local views. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of its dissemination. It is not intended to provide and should not be relied on for accounting, legal or tax advice. Before you make any investment decision, you may wish to consult an independent financial adviser. In the event that you choose not to seek advice from a financial adviser, you should carefully consider whether the investment product is suitable for you. You are advised to obtain appropriate professional advice where necessary.
The accuracy and/or completeness of any third-party information obtained from sources which we believe to be reliable might have not been independently verified, hence Customer must seek from several sources prior to making investment decision.
The following statement is only applicable to HSBC Mexico, S.A. Multiple Banking Institution HSBC Financial Group with regard to how the publication is distributed to its customers: This publication is distributed by Wealth Insights of HSBC México, and its objective is for informational purposes only and should not be interpreted as an offer or invitation to buy or sell any security related to financial instruments, investments or other financial product. This communication is not intended to contain an exhaustive description of the considerations that may be important in making a decision to make any change and/or modification to any product, and what is contained or reflected in this report does not constitute, and is not intended to constitute, nor should it be construed as advice, investment advice or a recommendation, offer or solicitation to buy or sell any service, product, security, merchandise, currency or any other asset.
Receiving parties should not consider this document as a substitute for their own judgment. The past performance of the securities or financial instruments mentioned herein is not necessarily indicative of future results. All information, as well as prices indicated, are subject to change without prior notice; Wealth Insights of HSBC Mexico is not obliged to update or keep it current or to give any notification in the event that the information presented here undergoes any update or change. The securities and investment products described herein may not be suitable for sale in all jurisdictions or may not be suitable for some categories of investors.
The information contained in this communication is derived from a variety of sources deemed reliable; however, its accuracy or completeness cannot be guaranteed. HSBC México will not be responsible for any loss or damage of any kind that may arise from transmission errors, inaccuracies, omissions, changes in market factors or conditions, or any other circumstance beyond the control of HSBC. Different HSBC legal entities may carry out distribution of Wealth Insights internationally in accordance with local regulatory requirements.
Important Information about the Hongkong and Shanghai Banking Corporation Limited, India (“HSBC India”)
HSBC India is a branch of The Hongkong and Shanghai Banking Corporation Limited. HSBC India is a distributor of mutual funds and referrer of investment products from third party entities registered and regulated in India. HSBC India does not distribute investment products to those persons who are either the citizens or residents of United States of America (USA), Canada, Australia or New Zealand or any other jurisdiction where such distribution would be contrary to law or regulation.
The following statement is only applicable to HSBC Bank (Taiwan) Limited with regard to how the publication is distributed to its customers: HSBC Bank (Taiwan) Limited (“the Bank”) shall fulfill the fiduciary duty act as a reasonable person once in exercising offering/conducting ordinary care in offering trust services/ business. However, the Bank disclaims any guarantee on the management or operation performance of the trust business.
The following statement is only applicable to PT Bank HSBC Indonesia (“HBID”): PT Bank HSBC Indonesia (“HBID”) is licensed and supervised by Indonesia Financial Services Authority (“OJK”). Customer must understand that historical performance does not guarantee future performance. Investment product that are offered in HBID is third party products, HBID is a selling agent for third party product such as Mutual Fund and Bonds. HBID and HSBC Group (HSBC Holdings Plc and its subsidiaries and associates company or any of its branches) does not guarantee the underlying investment, principal or return on customer investment. Investment in Mutual Funds and Bonds is not covered by the deposit insurance program of the Indonesian Deposit Insurance Corporation (LPS).
Important information on ESG and sustainable investing
Today we finance a number of industries that significantly contribute to greenhouse gas emissions. We have a strategy to help our customers to reduce their emissions and to reduce our own. For more information visit www.hsbc.com/sustainability.
In broad terms “ESG and sustainable investing” products include investment approaches or instruments which consider environmental, social, governance and/or other sustainability factors to varying degrees. Certain instruments we classify as sustainable may be in the process of changing to deliver sustainability outcomes. There is no guarantee that ESG and Sustainable investing products will produce returns similar to those which don’t consider these factors. ESG and Sustainable investing products may diverge from traditional market benchmarks. In addition, there is no standard definition of, or measurement criteria for, ESG and Sustainable investing or the impact of ESG and Sustainable investing products. ESG and Sustainable investing and related impact measurement criteria are (a) highly subjective and (b) may vary significantly across and within sectors.
HSBC may rely on measurement criteria devised and reported by third party providers or issuers. HSBC does not always conduct its own specific due diligence in relation to measurement criteria. There is no guarantee: (a) that the nature of the ESG / sustainability impact or measurement criteria of an investment will be aligned with any particular investor’s sustainability goals; or (b) that the stated level or target level of ESG / sustainability impact will be achieved. ESG and Sustainable investing is an evolving area and new regulations are being developed which will affect how investments can be categorised or labelled. An investment which is considered to fulfil sustainable criteria today may not meet those criteria at some point in the future.
THE CONTENTS OF THIS DOCUMENT OR VIDEO HAVE NOT BEEN REVIEWED BY ANY REGULATORY AUTHORITY IN HONG KONG OR ANY OTHER JURISDICTION. YOU ARE ADVISED TO EXERCISE CAUTION IN RELATION TO THE INVESTMENT AND THIS DOCUMENT OR VIDEO. IF YOU ARE IN DOUBT ABOUT ANY OF THE CONTENTS OF THIS DOCUMENT OR VIDEO, YOU SHOULD OBTAIN INDEPENDENT PROFESSIONAL ADVICE.
© Copyright 2024. The Hongkong and Shanghai Banking Corporation Limited, ALL RIGHTS RESERVED.
No part of this document or video may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of The Hongkong and Shanghai Banking Corporation Limited.
