About Riccardo Millich
Riccardo is a Sales Director with HSBC Markets & Securities Services. He is in charge of business development in the area of investment funds and services with Clients in Europe and Asia, both with traditional and alternative strategies. He has helped numerous asset managers and asset owners both in Europe and Asia finding their way in the Luxembourg toolbox and setting up funds in Luxembourg. Prior to joining HSBC Riccardo has held various Sales and Business Development roles in Securities and Funds Services as well as Asset Management in the funds distribution activity. He is an active member of fund industry committees and working groups and a regular speaker at conferences around the globe. Riccardo has also held many Directorship positions in Luxembourg UCITS and AIFs. Riccardo is a French and Italian National, graduated in Law, in Foreign Languages and Business Administration.
Riccardo Millich Sales Director with HSBC Markets & Securities Services says foreign investors – especially those from the EU and US – who invest in Chinese assets and are looking for ESG exposure, are also helping to drive an increase in the number of sustainable funds in Asia. He shares his insights on the impact of ESG on the Asian market.
Now that ESG has become mainstream in Europe, how does the situation look like in Asia and in China in particular? Is sustainable investing gaining ground?
There is an increasing awareness and importance of ESG in asset and wealth management in Asia. ESG investing is enjoying a boom, although some markets are further ahead in Asia.
In China, tackling pollution has been high on the agenda in the last few years following President Xi Jinping’s announcement in September last year that the country would become carbon-neutral by 2060. Its 14th five-year plan covering 2021-2025 has a strong focus on sustainable development.
Of any region, Asia is emerging as a leading region in environmental and social issues. 96% of investors and 92% of issuers regard these matters as very or somewhat important[i] (HSBC sustainable finance and investing survey, October 2020).
What’s more, we are seeing interest in ESG investing from Asian asset managers and asset owners accelerating, in particular in mainland China, Hong Kong and Singapore.
According to the ESG Investment in China report from Ping An Digital Economic Research Center (DERC), investments into ESG-themed ETFs in China hit a record high in 2019, up to 4 times that of 2018 year-on-year. While funds were flowing out of traditional ETFs in the first half of 2020, flows into sustainability-themed ETFs consistently increased. Total ESG assets in Asia came to US$25.4bn at the end of last year, as a result of US$7.9bn of inflows (Morningstar Global Sustainable Fund Flows report).
Foreign investors – especially those from the EU and US – who invest in Chinese assets and are looking for ESG exposure, are also helping to drive an increase in the number of sustainable funds in Asia.
Asia today, however, still lags Europe in terms of number of funds with an ESG focus. One reason could be the perception that sustainable investments will not deliver the quick returns often sought by Asian investors.
Relative to the size of the region and its growth potential, we still see a shortfall of ESG expertise that’s available to fund managers in Asia, but this is changing quite rapidly as a lot of Asian asset managers are building in-house environmental, social and governance capabilities and launching ESG strategies using various products including traditional UCITS actively managed funds, or ETFs.
In Europe, demand for ESG-related funds is mainly coming from high net worth individuals as well as large institutional investors who are required to invest part of their assets in sustainable products. Questions on ESG are now systematically part of the due diligence process when looking to onboard new funds.
If this clearly presents opportunities to develop and distribute ESG products to investors, it can on the other hand also increase complexity and compliance costs for financial firms. One example is on the distribution of funds in different European markets, where local regulators might have different disclosure requirements.
We are seeing interest in ESG investing from Asian asset managers and asset owners accelerating, in particular in mainland China, Hong Kong and Singapore.
What are the challenges?
If the trend towards more sustainable products is clear, Asian companies are facing several challenges that are slowing this process.
Selecting the right ESG investment and exposure in Asia might prove more challenging for an asset manager than is the case in Europe, and this is mainly due to lack of comparative data.
However, international investors must also meet ESG standards in their respective domiciles when investing in Chinese or Asian assets, which should also act as an incentive to drive improved reporting by local firms.
If just a few years ago it was hard to make ESG-themed investments in Asia because of this lack of data to measure companies’ ESG performance, this is, however, changing.
With the rapid growth of ESG-linked investments, we’re likely to see an increase in the quantity and quality of ESG disclosures from Chinese and Asian companies. According to a recent report published by Willis Towers Watson, the number of A-share companies disclosing ESG information has kept rising, although it still remains at a low level, with just over 25% of all A-share listed companies having issued ESG reports in 2019.
We see a lot of new regulation in Europe – how does this mirror in Asia?
Different factors have contributed to the increased interest of ESG in Asia, and regulatory developments are certainly one of the main factors that created this momentum. Asian regulators are putting in measures and infrastructure to enable the incorporation of ESG factors in the investment process. However, the heterogeneous nature of different markets in Asia implies a different approach and pace when it comes to the adoption of ESG.
Green investing has become a hot topic in China in the last few years as it aligns with its national priorities, and in particular sustaining current and attracting future international investors.
China’s policy and regulatory landscape have been developing fast in response to this change, and the implementation of new ESG practices suggests a serious shift towards meeting global standards.
China Action Group, a community of Chinese CEOs and chairpersons engaged in the activities of the World Economic Forum are calling on their peers in China to become Chinese ESG champions to realise the Sustainable Development Goals, a collection of 17 goals adopted by all United Nations member states in 2015 that provide a blueprint for “good growth” nationally and internationally. Recent changes in legislation are shifting voluntary to mandatory ESG disclosure requirements for listed firms, which is in line or even exceeds what is in place in other countries.
Investors are now actively engaging with listed companies on ESG matters, following the release of the Revised Corporate Governance Code for Listed Companies by CSRC (China Securities Regulatory Commission), and guidelines published by the AMAC (Asset Management Association of China) and the IAMAC (Insurance Asset Management Association of China) to help asset managers and insurers incorporate green investing into their businesses.
In Hong Kong the SFC (Securities and Futures Commission) has initiated in May 2020 with the HKMA (Hong Kong Monetary Authority) the establishment of the Green and Sustainable Finance Cross-Agency Steering Group which aims to support a greener and more sustainable future for Hong Kong, around 5 key action points which will include disclosures obligations aligned with the Task Force on Climate-related Financial Disclosures (TCFD) and a uniform set of sustainability reporting standards.
The SFC also released a consultation paper in October 2020 on proposed amendments to the Fund Manager Code of Conduct (FMCC) that require fund managers to consider climate-related risks in their investment and risk management processes. This consultation covers governance, investment management, risk management and disclosure requirements.
In Singapore, the MAS (Monetary Authority of Singapore) published in December 2020 the Guidelines on Environmental Risk Management for financial institutions. These guidelines cover Asset Managers, Banks and Insurers and aim to enhance financial institutions’ as well as segregated accounts managed by asset managers and funds’ (including REITS) resilience to and management of environmental risk by implementing sound risk management practice.
The Securities Commission Malaysia has recently issued an update to its corporate governance code introducing best practices for action on ESG risks and opportunities by company boards and senior management. The Commission also raised concerns over the gender composition of boards.
In India the SEBI (Securities and Exchange Board of India) is rolling out guidelines on ESG disclosures of listed companies and in Korea the FSC (Financial Services Commission) announced in January this year a series of measures to improve corporate disclosure.
Other regulators in other Asian countries have also taken necessary steps to help financial institutions meet their ESG targets. A lot more to come in the coming months.
Finally, if Asia was already convinced of the importance of ESG principles, according to HSBC’s Sustainable Financing and Investing Survey Asia report, the Covid-19 pandemic has reinforced that belief. Employee wellbeing in particular, has, for obvious reasons following the pandemic, jumped up in the agenda.