Asian clients warm to broadening ESG criteria beyond investments

In Asia, philanthropy and giving back to the community are the main means for the wealthy to do good, but sustainable investing, though relatively nascent, is clearly growing. 

“Pre-Covid, we saw a lot of cheque writing. But over the last few months, clients have come to see that they can invest in a way that gives them financial returns as well as pushing the ESG agenda,” says Joseph Poon, group head of DBS Private Bank in Singapore.

Many Asian economies are still developing, relying on heavy industries and coal production, and people’s consciousness around sustainability is not as mature as in the Western world, explains Mr Poon. While in Europe and the US, wealth has been passed down through multiple generations, much of the wealth in Asia is held by first-generation business owners who have worked hard to launch and develop their company, and who are attached to their local community. 

The pandemic, which has had disproportionate negative effects on disadvantaged segments of populations, has further fuelled their desire to give back, with many starting to help local people and support social enterprises. 

Moreover, the healthcare emergency has triggered an “explosion” of legacy planning conversations, with several clients setting up trusts, including pockets of philanthropy money.

A key goal of the  bank is to assist clients in their journey towards a more sustainable world. Mr Poon is convinced that by exposing clients to “the alpha of ESG investing”, they will come to appreciate the value of sustainable products and will also be encouraged to improve the sustainability standards of their own businesses. 

Narrow focus

While there is growing evidence of the correlation between robust ESG practices and strong corporate financial performance, Asian business owners, who represent 60 per cent of the bank’s clients, largely run their firm to maximise shareholder value, as opposed to considering the interest of all stakeholders. DBS Corporate Banking has a dedicated practice to help entrepreneurs in their transition towards sustainability, “We have a far broader sustainability agenda, beyond investments,” explains Mr Poon.

The private bank has also been active in building its ESG investment offering. Popular is its ESG outperformance note, re-launched in October following the success of one introduced in 2018, which has generated an average performance of 14 per cent so far. Structured as a three-year capped outperformance warrant, it takes a long position on the MSCI EM Asia ESG leaders, while simultaneously shorting the index from which it is derived. 

The women’s livelihood bond programme, the world’s first social sustainability bond listed on a stock exchange, has also appealed to HNW clients, both for its safety and social benefits. It funds high-impact enterprises in south and south-east Asia supporting under privileged women from rural families and has generated around 4 per cent returns since launch two years ago, thanks to the very low default rate of women borrowers. 

In September, DBS integrated MSCI ESG ratings into its wealth product suite, while wealth management clients can gain access to selected ESG themed third-party funds through the bank’s platform. 

Sustainable and impact investing today represent just five per cent of private banking client assets, but Mr Poon aims to double that over the next five years. A few favourable trends support his ambition. According to the CFA Institute, ESG assets under management in Asia have been the fastest-growing since 2014, and DBS survey findings show 77 per cent of wealthy clients intend to increase their exposure to ESG investments over the next three to five years.

Longer-term

The outperformance of sustainable strategies during the crisis has contributed to shift clients’ attitude, while fears of market downside are pushing Asian investors to embrace a longer-term horizon. 

“Several clients are still focused on the short term, but we are beginning to see many ask us to help them build a resilient portfolio. That is when we slip in ESG solutions, which are long term and diversified, and are also better at mitigating risks.”

Asian investors tend to be very home biased and sustainable regional products will proliferate once the appetite for these solutions grows, he expects.

The impending intergenerational transfer of wealth to sustainability-conscious millennial investors is also a key growth driver. “Most of these millennials have been studying, trained and worked in the US or Europe, so their sensibility around ESG is much stronger,” says Mr Poon. “We believe they are going to drive the ESG agenda much faster than their first-generation relatives.”