Asia’s asset owners are ready to invest in the energy transition, pending a policy signal

In many ways, Asia is the most critical piece of the global net zero puzzle. It is home to over 4 billion people and about 50% of the world’s greenhouse gas emissions including two of its largest sources – India and China. It is also the world’s largest source of future economic growth and projected energy demand.

For all its commercial prowess past, present and future - the region is also precariously vulnerable to climate change. Unmitigated climate change impacts Asia more than any other part of the globe according to Swiss Re, an insurer.

All this magnifies the role Asia’s asset owners play. The region’s capital allocators are a mixed bunch - from Western asset owners and managers to the region’s infamous state-owned investment vehicles and pension funds.

New research from the Asia Investor Group on Climate Change (AIGCC), sheds light on the current state of play of net zero investing in Asia. The AIGCC survey covers 183 Asia headquartered asset owners and asset managers who collectively oversee $33 trillion in assets under management.

The key takeaway: policy signals matter more than anything else.

Headwinds and tailwinds

The survey finds a common perception amongst Asian asset owners: gusts of policy headwinds are being felt across the region, slowing down allocation of capital waiting to be deployed.

Asia Investor Group on Climate Change CEO, Rebecca Mikula Wright said:

“Asia’s major investors have undeniably recognised that climate is going to move markets and reshape the region’s economic outlook, but policy barriers prevent them from actually moving the capital to mitigate climate risks in Asia”.

The recognition of climate risks and the willingness to act on it are strong tailwinds to capital allocation in Asia. 79% of surveyed asset owners and 87% of asset managers have publicly recognised climate change as a source of material risk and opportunity.

In a more direct sense, Asia’s asset owners are increasingly incorporating an official climate policy into their investment decisions. About half of the surveyed pool reported doing so, while 14% said they have done so “partly”. 20 investors said they have specific targets for increasing exposure to renewable energy assets in Asia.

Yet, incorporating climate change into capital allocation remains a work in progress for Asia’s asset owners. Short-term targets for reducing portfolio emissions are less common than in other parts of the world – just 25% of respondents said they have one.

This makes the drivers of capital allocation essential to understand. As part of the research, AIGCC asked respondents - “What have been the top drivers to consider climate considerations and net zero investing for your organisation?”

53% of responses said regulatory requirements topped the charts.

Incredible ambition or credible commitment?

Broadly speaking, a policy signal has three interdependent ingredients that investors look for – commitment, ambition and credibility.

It is not the case that Asian governments lack the first. Following the COVID-19 pandemic, several countries announced net zero targets including China, India and Indonesia – the region’s largest emitters. Their timing amplified the value of these targets.

It is ambition and credibility where progress is awaited. For investors to buy into Asia’s net zero policy signals, governments need to display both incredible ambition and credible commitment.

A litmus test is the extent of accountability. Most net zero targets in Asia are not enshrined in law, opening the door to questions over credibility.

The High-level Policy Commission on Getting Asia to Net Zero found “only nine of the 54 countries in the UN’s Asia-Pacific Group have legislated their net zero targets or enshrined them in policy documents. This leaves a major accountability loophole on implementation”.

These are not new concerns. At COP 28 in Dubai investors demanded strong policy signals including a commitment to phase out fossil fuels. Ultimately, the COP 28 deal fell short of a fossil fuel phase-out. Replacing it with a less than ideal plan to transition away from unabated fossil fuels, engulfed in carefully crafted language.

What was proposed but not achieved at COP 28, is precisely what will be needed in Asia.

“Commitments to triple renewable energy capacity and phase out fossil fuels, as proposed for COP 28, are the kinds of policy signals that will attract Asian investors’ capital”, said Rebecca Mikula Wright.