25 September 2019 Chief Investment Office GWM Investment Research

Sustainable investment in Asia Shifting Asia Wind powered turbines in the Pacific Ocean Gettyimages Editorial

Dear reader,

Few would have forecast a few years ago that China would to follow suit. Many have also backed regulators to enhance emerge as the world’s second largest green bond issuer in corporate stewardship and governance code frameworks 2018, just two percentage points behind the US; or that and enforced ESG disclosure reporting. The HKMA, which Abenomics would transform Japan into the world’s fastest- regulates the Hong Kong financial system and manages an growing sustainable investing (SI) market with a similar as- HKD 4 trillion Exchange Fund, is a case in point; it has been sets under management (AUM) penetration to what the US uniquely positioned to put into practice what it has promul- had in 2014; or that in 2019 Asia would have more stock gated via new green finance and ESG regulation. Others, like exchanges with mandatory environmental, social and gov- Singapore’s Temasek, have adopted ESG into investment ernance (ESG) reporting than any region in the world. decisions strongly motivated by climate change risk.

Attitudes toward sustainable investment in Asia have Asian asset owners have embraced SI because of the rising changed radically in just a few years. And while it has acceptance that SI does not compromise financial returns become evident that governments must lead in Asia to or performance. For long-term investors, including pension produce meaningful change to sustainability challenges, funds and insurance companies, SI can lower downside risk there has also been indirect pressure from the wider public from “stranded assets” created by climate change and on governments and corporations, particularly on issues re- transition risk. For credit investors, good corporate gover- lating to climate change and air pollution, which affect nance, the central pillar of ESG, can help lower credit risk. people every day in Asia’s cities. In emerging markets, ESG equity strategies have shown outperformance relative to broader benchmarks, which A key driver of Asian governments’ recent policy shift to- may be due to smaller perceived tail risks of companies ward SI has been the realization that sustainability linked with good corporate governance. For our clients, UBS investment can help tackle broader policy concerns; from advocates sustainable investment as a core strategy, shrinking labor forces and slowing economic growth, to mi- because its approach makes sense from the perspective of gration and infrastructure, climate change and low-carbon long-term capital preservation. world transition risks. To this end, sustainable finance and investment are being harnessed to support key government Sustainable investment is developing rapidly in Asia and policies, be it to strengthen corporate governance to stimu- with it the breadth and scope of local SI products is improv- late corporate profitability or to fund the infrastructure ing. The boom in green bonds in particular reflects pent-up expense burden with green finance initiatives. demand for investment opportunities in environmental themes, which have strong regional resonance. UBS advo- Asian state asset owners ranging from Japan’s government cates that clients adopt a portfolio approach to sustainable pension investment fund to the Hong Kong Monetary investment across all asset classes, both liquid and long Authority (HKMA), Singapore’s GIC and the Thai Government term. Investors planning legacy assets may consider “impact Pension fund, among others, have led the SI drive by leading investing” via private equity or direct investment, which through example: integrating sustainability into their own establishes a more direct link between the investment and investment process and obliging their investment managers the measurable social and/or environmental impact.

Min Lan Tan Head of APAC Investment Office

Shifting Asia: Sustainable investment in Asia – September 2019 3 Content

Introduction 6 Asia embraces sustainable investing

Chapter 1 8 Sharp rise in Asian UN PRI signatories

Chapter 2 14 Sustainable investing in Japan: A model for the rest of Asia?

Chapter 3 20 Asian regulators drive sustainable investing

Chapter 4 28 Climate change creating sustainability awareness in Asia

Chapter 5 30 Infrastructure spending and green financing as major SI drivers

Chapter 6 36 Investment implications 37 Sustainable investing and performance 40 Sustainable investing developing its own narrative in Asia 42 How to invest?

UBS Shifting Asia Project manager * An employee of Cognizant Group. This report has been prepared by UBS AG. Sita Chavali Cognizant staff provides support services Please see the important disclaimer at the to UBS. end of the document. Past performance is Editor not an indication of future returns. Aaron Kreuscher

Editor in Chief Design Hartmut Issel Pavan Mekala*

Contributor Cover photo Rachel Whittaker Arashiyama bamboo forest in Kyoto, Japan  Gettyimages Author Carl Berrisford Contact ubs[email protected] Learn more at: www.ubs.com/cio

4 Shifting Asia: Sustainable investment in Asia – September 2019 Executive summary

––Sustainable investment in Asia is poised for rapid growth as government policies increas- ingly address the growth risk from shrinking labor forces, climate change, the transition to a low-carbon world, inadequate infrastructure, infrastructure funding and the health bur- den from air pollution. In the last three years, Asian asset owners signed up to the UN’s Principles for Responsible Investment (PRI) have surged, with the overall AUM rising to USD 5trn, almost a quarter of the world’s top 100 asset owners’ AUM. “Asian green ––Japan exemplifies how markets can rapidly catch up with the estr of the developed world. When Japan’s USD 1.4trn national pension fund championed ESG investing in bond annual 2014, as a means to improve corporate profitability, Japan SI assets reached 18% of issuance total assets (equivalent to the US in 2014) within just three years. Others are following could soon suit: Hong Kong’s HKMA, which manages a USD 513bn Exchange Fund, is soon to be a UN PRI signatory; Thailand, Malaysia and Korea’s national pension funds, with a com- triple to USD bined AUM of USD 866bn, have become UN PRI signatories and are espousing critical 150bn, in our top-down regulatory change. In Singapore, climate change risk mitigation has been a strong driver of asset owners Temasek and GIC’s stewardship and ESG investment view.“ processes. ––Asia is the world’s most vulnerable region to rising sea levels, as most of its economic out- put is concentrated in coastal megacities. Inadequate attention to climate change risk could cost its economy at least USD 2.8trn, excluding transition risk costs. This is raising the TCFD (Task Force on Climate-related Financial Disclosures) climate-related risk of Asian corporates and their Asian asset holders and spurring tightened environmental regulatory disclosure across the region. Eight Asian stock exchanges have mandatory ESG reporting standards, more than any other region in the world. Hong Kong and Singapore are enhancing and wire-tightening the quality of ESG data and disclosure, paving the way for a broader suite of ESG products and expanding SI markets. ––Asia is estimated to require annual investment of at least USD 1.7trn in infrastructure to sustain current economic growth rates. In an increasingly low-carbon world, we expect to see this investment contribute to expansion of green financing and green bond markets. China’s green bond market has ballooned in just three years to become the world’s second largest, just 2 percentage points behind the US. Asian green bond annual issuance, driven by the region’s extensive infrastructure funding needs, could soon triple to USD 150bn, in our view. Hong Kong and Singapore, which are fast developing as offshore green finance hubs and are quickly scaling their sustainable investing capabilities, are well positioned to capture this growth. –– China’s aim to lead the world in low-carbon technologies, such as electric vehicles and renewable energy, is partly motivated by its own severe air pollution problems, which raise the national health burden. This creates a strong incentive to expand its low-carbon initiatives, both technological and financial, across the 60 developing countries within its Belt & Road

Initiative; these markets are forecast to contribute 50% of the world’s CO2 emissions by 2050. This should further catalyze the growth of green and low-carbon financial markets beyond its own borders and across Asia. ––Sustainable investment in Asia is clearly developing its own narrative, with deep investor concerns about air quality, health and environmental issues related to climate change. Asian millennials also show positive attitudes to consuming in a responsible way. A rising Carl Berrisford acceptance that sustainable investments do not compromise financial performance is cre- Analyst ating an awareness that one can invest in a manner that also addresses one’s own partic- ular sustainability concerns. UBS advises its clients to engage sustainable investing through individual asset classes or adopting a multi asset portfolio approach. Impact investing also offers a clear link between investment and measurable social and/or envi- ronmental impact through private equity or direct investment.

Shifting Asia: Sustainable investment in Asia – September 2019 5 Introduction Asia embraces sustainable investing

“Our challenge is to help more people to make healthy money, ‘sustainable money,’ money that is not only good for themselves but also good for the society.” Jack Ma Former Chairman, Alibaba

Shanghai Bund skyline landmark, Ecological energy renewable solar panel plant Gettyimages

6 Shifting Asia: Sustainable investment in Asia – September 2019 Introduction – Asia embraces sustainable investing

In Asia, sustainable investing (SI), the incorpora- “Asset owner” tion of environmental, social and corporate gov- ernance (ESG) considerations into investment de- cisions, is entering a new and exciting era of An organization that manages growth. According to the Global Sustainable In- or controls investment funds, vestment Alliance (GSIA), between 2012 and 2016, SI assets in Asia grew from USD 40bn to either on its own account or USD 526bn, driven mostly by Japan. From 2016, on behalf of others, and following the merger of UN Principles for Re- which owns more than half of sponsible Investment (PRI) and the Association for Sustainable & Responsible Investment in Asia, such investment funds. GSIA ceased to publish a breakdown of Asia ex-Ja- pan SI assets. SI assets as a share of total assets in Japan rose from 3.4% in 2016 to 18.3% in 2018, the same level of penetration that the US reached “Asset/investment manager” in 2014. Although statistics tell us that Asia’s ESG story has so far been limited largely to Japan, we An organization that manages argue in this paper that the Asia ex-Japan region, or controls investment funds, like Japan before it, is poised to catch up fast, propelled by a similar institutional approach to either on its own account or sustainable investing led by governments, which on behalf of others, and which increasingly view sustainable investing as does not own more than half compatible with their own long-term policy direction. of such investment funds.

The push for sustainable investing in Asia has historically been driven by European asset own- SI best practices developed by global institutions ers and signatories to the UN PRI (launched in and based on developed markets have often set 2006), particularly sovereign wealth and pension the precedent and provided frameworks for Asia funds. In more recent years, this has shifted with to follow. Examples include the PRI, a framework Asian asset owners starting to emerge with re- for investors; the Global Reporting Initiative (GRI) gional models for sustainable investment, as re- and the Sustainable Accounting Standards Board flected by the sharp growth in local signatories (SASB), both of which help corporations improve to the UN PRI. their transparency to investors on ESG issues; and the growth in the availability of ESG research A key driver for Asia has been Japan, which and ratings from both established and new spe- since 2017 led the drive into sustainable invest- cialist data providers such as MSCI, Sustainalytics ment through the Government Pension Invest- and ISS, helping investors to integrate ESG con- ment Fund (GPIF). The Japanese government-led siderations into investment processes. While model is in many aspects suited to Asia due to its these bodies have been around for many years – centralist government approach, and is a work- the GRI for example was founded in 1997 – the ing model that asset owners and investment growth in ESG invested assets in Asia has only managers in other Asian countries could repli- taken off more recently as investors (and govern- cate. Hong Kong is already considering following ments) respond to a set of increasingly daunting elements of the Japan model, with the Hong domestic challenges. These include slower eco- Kong Monetary Authority’s reserve fund engag- nomic growth; rapidly ageing societies, particu- ing in SI and about to complete the PRI signatory larly in Japan; the need for infrastructure invest- application process. Other Asian governments, ment to sustain economic growth, particularly in like Singapore’s, are also seizing the initiative, Asia’s emerging markets; Asia’s high vulnerability particularly in the area of regulation, banking to climate change; and the environmental, par- and green financing. ticularly clean air, impact of breakneck urban growth and migration in many Asian countries.

Shifting Asia: Sustainable investment in Asia – September 2019 7 Chapter 1 Sharp rise in Asian UN PRI signatories

“We owe it to future generations to put our planet on a sustainable footing” Lim Boon Heng Chairman, Temasek

Hong Kongs first zero carbon building Gettyimages

8 Shifting Asia: Sustainable investment in Asia – September 2019 Chapter 1 – Sharp rise in Asian UN PRI signatories

Beijing’s Central Line Gettyimages

Although the GSIA, the industry leader in moni- toring SI assets globally, has stopped gathering data on SI assets for Asia ex-Japan, the contin- ued growth in SI in the region is evidenced by the sharp rise in the number of PRI signatories and their assets under management (AUM). This augurs well for the future growth of SI assets in the region. Recent signings by asset owners like AIA in Hong Kong, the Employee Provident Fund and Khazanah Nasional Berhad in Malaysia, the Thailand Pension Fund, and Chinese asset man- agers Harvest Fund Management, China Asset Management, E Fund Management and Bosera Funds have propelled PRI signatory AUM in the

Fig. 1 PRI signatories region growth in 2018 Asia has the highest growth rate in number of signatories

35 1,200

30 1,000 25 800 20 600 15 400 10

5 200

0 0 Europe North Latin Asia Oceania Africa Middle America America East

Growth of signatorties (in %, LHS) Number of PRI Signatories (RHS)

Source: UN PRI, UBS, as of August 2019

Shifting Asia: Sustainable investment in Asia – September 2019 9 Chapter 1 – Sharp rise in Asian UN PRI signatories

Fig. 2 Asia’s commitment to ESG The number of service providers, investment managers and asset owners who have signed the UN PRI

80 70

60

50 40 30 20 10 0 China Hong Kong India Indonesia Japan South Korea Malaysia Singapore Thailand Vietnam

Asset owner Service provider Investment manager

Source: UBS, as of September 2019

region to USD 2.9trn as of July 2019. Mean- owners, like China’s Harvest and the Thai Pension while, the strong momentum in Japanese signa- Fund, are rapidly applying SI approaches across tories has continued since the GPIF (the world’s their entire portfolio and asset allocation. largest pension fund) became one in 2015. Total PRI subscribed AUM in Japan reached USD 8.8trn PRI signatory AUM in Asia still has plenty of room as of July 2019, with notable growth in 2019 to grow. Some of the region’s largest asset own- driven by new asset owner signatories Sumitomo ers, with a total AUM of USD 2.7trn, have yet to Mitsui Trust Bank and Sumitomo Life Insurance, sign and there are less regional investment man- which together added USD 784bn in new PRI ager signatories. In Asia, the challenge to becom- subscribed AUM. Total AUM signed up by Asian ing a UN PRI signatory is the PRI requirement to asset owners is now equivalent to half of the provide reporting on two-thirds of SI assets, AUM of the world’s top 20 asset holders. including AUM and asset allocation breakdown. Some Asian asset owners may not be quite ready PRI signatory AUM is not the same as dedicated to take this step for strategic reasons despite ESG-managed AUM; one can also have ESG man- already having their own internal ESG investing aged assets and not be a PRI signatory like Singa- policies. For sovereign wealth funds, the PRI has pore asset owners GIC and Temasek, and PRI sig- introduced a waiver for this requirement and natories don’t always offer strategies that are plans to introduce separate reporting dedicated to ESG (though many do). Nonetheless, requirements for banks, which may resolve some for many asset owners and investment managers, of the pushback to signing up in Asia. being a signatory forms an important first step to engaging with SI due to the requirement that a As Japan has shown, when leading state asset responsible investment policy covers 50% of AUM owners become signatories, it can set off a chain within two years (see grey box on UN PRI on page reaction with other state and private asset own- 11). Most commit to move toward SI for all of ers following suit. After signing the PRI, the GPIF their assets, but may start with a single asset class, started requiring external managers to establish usually long-only equity as this is the asset class ESG investing frameworks and guidelines (refer that has the resources and support available for to interview with the HKMA’s Kim Chong on integrating ESG considerations. Some Asian asset page 12).

10 Shifting Asia: Sustainable investment in Asia – September 2019 Chapter 1 – Sharp rise in Asian UN PRI signatories

What are the United Nations Principles for Responsible Investment?

The Principles for Responsible Investment (PRI) is an independent investor initiative supported by the United Nations. The six Principles for Responsible Investment are a voluntary and aspirational set of investment guidelines:

Principle 1 We will incorporate ESG issues into investment analysis and Principle 6 decision-making Principle 2 We will each report processes. We will be active on our activities and owners and incorporate progress towards ESG issues into our implementing ownership policies the Principles. and practices. UN PRI Principle 5 Principle 3 We will work We will seek together to enhance appropriate disclosure our effectiveness on ESG issues by the in implementing Principle 4 entities in which the Principles. We will promote we invest. acceptance and implementation of the Principles within the investment industry.

Source: UN PRI www.unpri.org/pri, UBS

These principles were developed by and for investors to help them incorporate ESG issues into investment decisions, thereby helping build a sustainable global financial system benefiting the environment and society as a whole and enabling long-term value creation.

Becoming a signatory to the PRI is a public demonstration of an organization’s commitment to the mission. Signatories are asset owners, investment managers and investment service provid- ers. Asset owners include pension funds, sovereign wealth funds, foundations, endowments, insurance and reinsurance companies and other financial institutions that manage deposits. Investment managers are organizations that manage third-party assets, and service providers offer solutions or services to assets owners or investment managers.

To maintain PRI signatory status, organizations are required to pay an annual membership fee and, more importantly, to publicly report on their journey toward responsible investment through the PRI Reporting Framework. The first reporting cycle for a signatory is optional but highly encouraged for learning experience. Subsequently, it is compulsory for signatories to file an annual report to detail their progress. An audit procedure will determine if these organiza- tions “walked the talk” by demonstrating the minimum requirements for responsible investing set out by the PRI. Such requirements include obligating half of a fund manager’s assets to be following the responsible investing policy. Signatories that fail the audit process are placed on a watch list for two years. During these two years, the organization must make improvements to meet the minimum requirements or risk being de-listed as a signatory. However, a de-listed sig- natory can regain signatory status should it complete its reporting framework.

Shifting Asia: Sustainable investment in Asia – September 2019 11 This interview contains views which originate from outside Chief Investment Office Global Wealth Management (CIO GWM). It is therefore possible that the interview does not fully reflect the views of CIO GWM.

Interview with Kim Chong Head of Risk Management & Compliance Hong Kong Monetary Authority (HKMA)

Kim has headed up the Risk Management and Compliance Division of the Hong Kong Monetary Authority (HKMA) since August 2015. He is responsible for all aspects of risk management relating to the investment portfolios of the HKMA. The role extends to compliance aspects of investment transactions and at the portfolio level. He is also responsible for performance measurement of the overall investment portfolio. His team is responsible for ESG research and implementation.

What triggered the HKMA’s announcement of due diligence of private market investments, three new measures for sustainable banking among others. With the measures in place, we and green finance in May this year? Is the effectively adopt a guiding principle that if we HKMA already investing in ESG products as were to choose between two investments with pledged in Measure 2? comparable risk-adjusted return characteristics, we should prioritize the one with higher ESG I think the HKMA’s 7 May 2019 announcement content. on new measures for sustainable banking and green finance made very clear our stance and The HKMA has an HKD 4trn Exchange Fund approach on the ESG issue to the public. The to manage. Are there any specific allocations Hong Kong government announced its goal to to ESG investments? become a green finance hub last year, and con- cerns over climate change and sustainability have We have adopted ESG integration in our ap- grown very fast globally, partly driven by the proach to investment and have been weaving Paris Agreement and the increased frequency of ESG factors into our investment process for both extreme weather conditions and their destructive public and private market investments. On the is- effects around the world. sue of whether to pursue an asset allocation target for ESG investing, we are of the view that In terms of investment, the HKMA is already en- a bottom-up approach to sourcing appropriate gaged in green bond and other green invest- ESG investments may be more appropriate – ments, including renewable energy and green which means that we look into aspects of ESG buildings. We are giving more weight to ESG in content in our investments. The rationale is that our mandates, for example, by requiring external ESG assessment is highly situational and project managers of Hong Kong equities and active specific. Therefore, rather than adopting a one- China equity portfolios to comply with the Princi- size-fits-all threshold or benchmark to assess the ples of Responsible Ownership issued by the Se- ESG risks of a project, we tend to identify ESG curities and Futures Commission in 2016 on a factors that are relevant to a project and then as- “comply or explain” basis. Other ESG implemen- sess their impact on the project for a better risk- tation measures include incorporation of ESG adjusted investment decision. By looking deeper factors in our credit risk analysis of our bond into specific projects or mandates, we would also portfolio and examination of ESG policies and try and avoid “greenwashing” investment pro- practices of our general partners as part of our posals.

12 Shifting Asia: Sustainable investment in Asia – September 2019 This interview contains views which originate from outside Chief Investment Office Global Wealth Management (CIO GWM). It is therefore possible that the interview does not fully reflect the views of CIO GWM.

Do you believe Japan’s top-down ESG model We understand that the HKMA is in the is suitable for Hong Kong? What drives the process of becoming a UN PRI signatory. Do ESG mindset in HK? Is it climate change, you expect many of your external managers infrastructure, the environment or something or other Hong Kong asset owners to follow else? suit? What is the pushback to becoming a signatory in your view? The GPIF’s engagement with ESG is very much aligned with Abenomics, its “three arrows,” and Yes, we are in the process of signing up to the its focus on governance and diversity. In Europe, UN PRI. In complying with the UN PRI require- there is good public awareness, for example, of ments we expect all required public disclosures the risk of climate change and environmental to be ready by 2021. The burden of disclosure issues, which have reached the trustees and might be one of the factors that asset owners boards of pension funds through concerned consider before signing up to become a PRI sig- stakeholders. There is a growing environment- natory. focused green finance movement in Hong Kong, which, together with the stewardship code We have included ESG factors in the selection, launched in 2016, has become the main driver appointment and monitoring of our external for the ESG trend here, from our perspective. managers. We want our external managers to With our unique role as the banking regulator take ESG matters seriously and we expect them and promoter of green finance in Hong Kong as to help us discharge our ownership responsibili- well as an asset owner, the HKMA has a three- ties in the investee companies by adopting active pronged approach to help promote ESG. ownership through voting and engagement ac- Further, by supporting the Task Force on Climate- tivities. related Financial Disclosures, we seek to collabo- rate with like-minded investors to promote ESG By becoming a UN PRI member we hope that standards in the investment process. In the bank- other asset owners will be encouraged to be- ing sector, there are initiatives to develop a come members, making green and sustainable framework for greening the financial system. We investment a core aspect of their investment. have also established a Centre for Green Finance to promote and advise relevant parties on the subject.

Shifting Asia: Sustainable investment in Asia – September 2019 13 Chapter 2 Sustainable investing in Japan: A model for the rest of Asia?

“Innovation and corporate governance are extremely important to improve the profitability of Japanese companies“ Shinzo Abe Japan’s prime minister

Mt. Fuji Gettyimages

14 Shifting Asia: Sustainable investment in Asia – September 2019 Chapter 2 – Sustainable investing in Japan: A model for the rest of Asia?

Sign of the charge stands of Japan Gettyimages

In September 2015, Japan’s JPY 160trn GPIF be- Since the GPIF cannot directly own Japanese came a PRI signatory. The move set a precedent companies by law, its stewardship activities focus for the Japanese asset management community on intermediaries or asset managers. The change – the number of Japanese PRI signatories in corporate culture from the new codes encour- reached 57 in the following two years, a 68% aged asset managers to not only improve their rise, with combined assets managed under SI own governance, but that of their portfolio hold- principles rising from USD 7bn in 2014 to USD ings while integrating long-term ESG factors into 2.18trn in 2018. In July 2017, the GPIF made its the investment process. maiden commitment to sustainable investing with a JPY 1trn investment in three listed ESG The Japanese sustainable investing approach has indices. This brought the penetration of SI been a top-down one, aligned with Prime Minister managed assets as a share of total Japanese Shinzo Abe’s economic policies (“Abenomics”). It’s AUM to 18% in 2018, the same as the US in led by a government asset owner and dissemi- 2014, making it the world’s fastest-growing nated to domestic asset managers through a cul- market for SI. ture of corporate stewardship and governance supported by appropriate regulation. Can this Japan’s remarkable success in growing SI assets model be replicated in other Asian markets? We in such a short time frame is impressive, all the believe so, as the strong state-policy-led economic more so in light of the fact that the Tokyo Stock management in most of Asia should enable such a Exchange still does not require mandatory ESG top-down approach, although the drivers and reporting (refer to SSEI table on page 22). motivation for establishing sustainable investment Japan’s success can be attributed to the Financial may be different. Services Agency’s (FSA) launch of the Japanese Stewardship Code in 2014, which created the In Japan, ageing demographics, a shrinking labor basis for the right corporate culture for asset force and low corporate capital returns have ne- owners and managers to engage with ESG is- cessitated a new corporate culture encouraging sues. The new code encouraged sustainable in- efficiency and a change in labor culture, vesting practices, investee-client engagement elements which Abenomics has embraced. and a “comply or explain” approach to the code. Improved corporate stewardship and governance A year later in 2015, Japan introduced a new fit well into this model. Corporate Governance Code, which, according to Natsuho Torii of the Japan Exchange Group, required corporations to take positive measures to address sustainability issues.

Shifting Asia: Sustainable investment in Asia – September 2019 15 Chapter 2 – Sustainable investing in Japan: A model for the rest of Asia?

Japan; Minamisona photovoltaik power plant Gettyimages

Elsewhere in Asia, sustainable investing is likely implement what it espouses. As the HKMA’s to be driven more by infrastructure investment Kim Chong explains in his interview on page 12, and green financing. China’s 13th Five-Year Plan with the key measures for Sustainable Banking (2016–2020), for example, includes the commit- and Finance put in place in May 2019, the HKMA ment to grow a green bond market and establish commits to putting responsible investment to green development funds. Both Hong Kong and practice by employing ESG factors in its credit risk Singapore compete in the green financing mar- analysis of bond investments, requiring external ket as regional financial centers. Indeed, the managers to comply with the SFC’s principle of Hong Kong government seeks to become a Responsible Ownership, growing its green bond “regional green finance hub” and Beijing plans portfolio and investing in ESG-themed equities via to use it as a green financing center for Belt & ESG benchmark indices. These measures have Road Initiative (BRI) infrastructure investment. close echoes of Japan’s GPIF approach, as Pat Thus, while asset owners and investment manag- Woo explains on page 34. With an HKD 4trn ers from outside Asia will likely continue to drive (USD 512bn) Exchange Fund, ESG investment by ESG investing trends in Asia as their own sustain- the HKMA could catalyze the broader Hong Kong able investment mandates rise, a key catalyst for market toward sustainable finance. The HKMA a breakthrough in sustainable investing in Asia has acknowledged that investing according to ex-Japan could, like Japan, be government- ESG criteria is now already part of its own and its driven. external managers’ investment process. Hong Kong’s Mandatory Provident Fund (the pension Recent developments, for example, in Hong Kong fund), which manages close to HKD 1trn, and the suggest that this is starting to happen. The HKMA, Hong Kong Hospital Authority could potentially as both Hong Kong’s banking regulator and emulate the HKMA by integrating ESG in their in- manager of the Exchange Fund, is well placed to vestment decisions.

16 Shifting Asia: Sustainable investment in Asia – September 2019 Factory pipe polluting air Gettyimages

Shifting Asia: Sustainable investment in Asia – September 2019 17 This interview contains views which originate from outside Chief Investment Office Global Wealth Management (CIO GWM). It is therefore possible that the interview does not fully reflect the views of CIO GWM.

Interview with Natsuho Torii Deputy Secretary General, Sustainability Committee, Japan Exchange Group

Natsuho Torii has been a leading presence in Japan Exchange Group’s (JPX) sustainability project from before it joined the Sustainable Stock Exchanges (SSE) Initiative in 2017. In 2018, she was appointed deputy secretary general of the newly formed Sustainability Committee, which oversees JPX’s sustain- ability projects, including encouraging ESG disclosure at listed companies and expanding JPX’s ESG product line-up. She is also a vice chair of the Sustainability Working Group at the World Federation of Exchanges (WFE), the global industry association for exchanges. She joined JPX in 2010.

What has JPX been doing to encourage ESG companies that promote women’s participation investment in Japan and how do you in and contribution to the workforce and have a increase understanding and appreciation of high appreciation for employee health and wel- the impact of ESG? fare, by publishing their names under “Nadeshiko Brand” and “Health and Productivity” stock In 2015, we created Japan’s Corporate Gover- selections. nance Code with the Financial Services Agency, which encourages listed companies to consider What drives Japanese corporations to shift taking positive and proactive measures to address toward ESG? Have there been any key sustainability issues. Dialogue regarding ESG pro- events or regulation changes? gressed, and in June 2018 the code was revised, In 2015, several key events took place that en- clarifying that ESG issues should be included in couraged Japanese companies to embark on sus- “non-financial information” for reporting pur- tainability: the Paris Agreement, the adoption of poses. We also produced a Japanese translation the United Nations’ Sustainable Development of the SSE’s model guidance for ESG reporting Goals, and in Japan, the implementation of the that provides principles and points to consider Corporate Governance Code and the Steward- when looking at ESG disclosure. We regularly col- ship Code. The GPIF, the world largest pension laborate with third parties, including arranging fund, announced that it would integrate ESG seminars and symposiums to share information into its investment analysis and decision-making among market participants and to identify what and became a signatory of the PRI in the same ESG information is useful for investors, and also year. This had a significant impact on investors take part in global initiatives such as the World and asset managers, which in turn led corpora- Federation of Exchanges’ Sustainability Working tions to be more proactive about ESG disclosure. Group. JPX develops and provides sustainability All of these events have enabled companies to products such as ESG-based indices, including the put emphasis on ESG issues and build ESG strat- Carbon Efficient Index and the Capex and Human egies over the last few years, including the Cor- Capital Index with S&P, and has launched a Green porate Governance Code, which we believe has and Social Bonds Platform. We also spotlight helped Japanese corporations establish efficient

18 Shifting Asia: Sustainable investment in Asia – September 2019 This interview contains views which originate from outside Chief Investment Office Global Wealth Management (CIO GWM). It is therefore possible that the interview does not fully reflect the views of CIO GWM.

and effective corporate governance in order to Japan is perhaps one step ahead of other measure their business risks and opportunities Asian countries in sustainable investing. and enhance long-term corporate value. Re- Do you think Japan will become a leader of cently, we have seen significant improvements sustainable investing in APAC in the future? regarding ESG disclosure, and more and more Can the Japanese model be used for ESG companies have been endorsing the concept of investing in the rest of Asia? ESG. All the members of the SSE acknowledge their Mandatory ESG disclosure is applied in role in fostering and promoting the development many markets in Europe and Asia. Is JPX of a sustainable financial system. Not only in also moving in the same direction? If not, APAC but also globally, each exchange generates why? ideas, but instead of a few exchanges taking the lead they look for the best solutions together. As Each market adopts a different approach to ESG the exchanges are at different stages of market disclosure as each market has different regula- development, there is no such thing as a one- tory, economic and social backgrounds. JPX be- size-fits-all methodology or standard. Moreover, lieves voluntary disclosure is best for Japan in the the elements of E, S or G may change over time. current environment as each corporation is at a But some basic information concerning the envi- different stage of ESG development, with differ- ronment, for instance, can be standardized glob- ent opportunities and constraints. In addition, ally. For example, the Task-force on Climate-re- awareness of the importance of ESG manage- lated Financial Disclosures (TCFD) is likely to have ment has already somewhat penetrated into cor- a considerable impact in the near future. porations, especially large-cap companies that The TCFD’s recommendations provide a good have established their own ESG disclosures. As framework for climate-related disclosure prac- Japanese companies are moving in the right di- tices, and the number of supporter organizations rection, we seek to promote guidelines progres- is growing worldwide. sively rather than ask for compulsory disclosure. In the meanwhile, we believe the mutual under- Any developments at ESG-conscious asset own- standing of both corporations and investors ers are always of interest. We work to constantly through dialogue is indispensable for further ESG communicate with asset owners such as the GPIF development in Japan and we intend to continue as well as the government, and we share Japan’s encouraging this in the near future. developments with other exchanges.

Shifting Asia: Sustainable investment in Asia – September 2019 19 Chapter 3 Asian regulators drive sustainable investing

“The HKMA, in support of the mission to reduce climate change risks and to achieve sustainable finance, will launch three sets of measures” Norman Chan CE , HKMA

Hydroelectric dam on Danjiangkou reservoir, China Gettyimages

20 Shifting Asia: Sustainable investment in Asia – September 2019 Chapter 3 – Asian regulators drive sustainable investing

Greater adoption and enforcement of fund, in 2018 was broadly welcomed and closely stewardship codes followed by the exercise of its voting rights in Stewardship codes are guidelines for how an in- leading Korean companies. In Hong Kong, al- vestor exercises corporate ownership and gover- though the Principles of Responsible Ownership nance, including engagement with invested were introduced by the SFC in 2016, only in 2019 companies. The emphasis they place on good has the HKMA led by example in forcing its exter- corporate governance leads many to believe that nal equity portfolio managers to comply with the getting the “G” in ESG right is crucial for the PRO. In Asia, the effectiveness of stewardship creation of a sustainable investing culture. With codes seems to often depend on their adoption corporate governance strengthened, it follows and enforcement by leading state asset owners. that attention to ESG issues by investors occur as a matter of corporate risk management and best Asian regulators enhance ESG reporting practice implementation. Japan was one of the standards first Asian countries to introduce a Stewardship While the emphasis on corporate stewardship as Code in 2014, which the GPIF actively embraced. a practical top-down approach for establishing Now seven jurisdictions across Asia have also es- an ESG investing culture is growing in Asia, bot- tablished stewardship codes. In some countries tom-up development remains important as well this has been a response to high-profile corpo- – i.e. incorporation of ESG factors into the in- rate governance scandals. vestment process, through research and portfolio construction. As the HKMA’s head of compli- In Malaysia, the Code for Institutional Investors ance, Kim Chong highlights in the interview on was introduced in 2014 but has encountered page 12 the availability of reliable ESG data can challenges in that many leading institutional in- be a constraint to SI. vestors are owned by government-linked compa- nies. Here the risk of corporate abuse related to Access to ESG-related data on investee compa- domestic politics has been high, as seen by the nies is important, as it allows investors to evalu- 1MDB scandal. In Korea, the Stewardship Code ate a company’s management of ESG risks and was established in 2016, in part due to calls to opportunities and engage meaningfully on ESG strengthen corporate governance standards after issues. Most Asian stock exchanges have signed several scandals including the Samsung-Cheil In- up to the Sustainable Stock Exchange Initiative dustries merger and Hanjin Group events. Corpo- (SSEI), marking a commitment to promote SI and rate stewardship, including active ownership and encourage better corporate management of ESG direct engagement (see pop-up box below), has issues. Aside from top-down engagement activi- received pushback in Korea, where it is often re- ties by shareholders, regulators that enforce garded as investor overreach and interference. mandatory reporting on ESG criteria can help es- The adoption of the code by the Korean National tablish corporate awareness of sustainability is- Pension Service, the world’s third-largest pension sues. The “dialogue,” alluded to by Pat Woo in

The power of engagement

Successful engagement can mitigate risk and enhance long-term shareholder value. It is most effective in concentrated portfolios where the investors can devote significant time to each holding and identify those companies most likely to be receptive to proactive investor involve- ment. Active shareholder engagement, directly with the company or by filing shareholder pro- posals, is a way of achieving positive impact by incrementally altering the behavior of targeted corporations for the better. A number of studies have documented that following ESG engage- ment strategies can lead to outperformance (Hopener et al. (2019) and Dimson et al. (2015))1.

1 Please refer to “UBS Sustainable investing: education primer: ESG engagement equities” dated 01 August 2018

Shifting Asia: Sustainable investment in Asia – September 2019 21 Chapter 3 – Asian regulators drive sustainable investing

his interview (page 34), that emerged between mandatory ESG reporting requirements, eight are listcos and the Hong Kong Securities Exchange in Asia, the largest number of any region: Commission after the latter introduced its May Hong Kong, India (Bombay SE and NSE), Malaysia, ESG reporting guide is a testament to this. Thailand, Singapore and Vietnam (Hanoi SE and Ho Chi Minh SE). By 2020 we expect more Asian ESG data transparency has improved considerably countries to join this list, including China, Indone- in developed markets in recent years, particularly sia and the Philippines. And while quality and in Europe and the US as a result of the demand standards for ESG data in Asia is mixed, there is for information from investors. The availability of evidence it is improving with more detailed met- ESG data in Asia is still patchy, with many Asian rics, especially around environmental disclosure. In countries still lagging Europe and the US in terms key markets like Hong Kong and Singapore, of transparency. However, the growth in PRI signa- greater tightening of existing ESG reporting stan- tories and SI assets should provide a catalyst for dards has occurred over the last 12 months. improved data, greater availability of third-party ESG ratings, and ultimately a wider range of SI Significantly, currently no Asian stock exchanges products, including investable ESG indices as well have sustainability bond listings. However, we as other SI approaches (refer to “How to invest?” anticipate this will change. Key asset owners like on page 42). the HKMA are incorporating sustainable invest- ing principles into bond investments – which According to SSEI’s 2018 Report on Progress, of should catalyze the development of sustainable the world’s 16 stock exchanges that have bond products across the region.

Fig. 3 ESG reporting status of Asian exchanges

Country Stock exchange SSE Partner Exchange on sustainability Has report from ESG reporting Requires listed companies Offers written guidance ESG reporting related training Offers ESG Has sustainability related indices Has sustainability bond listing category China Shanghai Stock Exchange      China Shenzhen Stock Exchange     China, Hong Kong Exchange SAR Hong Kong       India National Stock Exchange of India       Indonesia Indonesia Stock Exchange  Japan Japan Exchange Group, Inc     Korea Korea Exchange   Malaysia Bursa Malaysia       Philippines Philippine Stock Exchange   Singapore Singapore Exchange       Thailand Stock Exchange of Thailand      Vietnam Ho Chi Minh Stock Exchange       Source: UBS, as of September 2019

22 Shifting Asia: Sustainable investment in Asia – September 2019 Chapter 3 – Asian regulators drive sustainable investing

Power supply for charging of an electric car Gettyimages

China Singapore

Fang Xinghai, the Vice Chairman of the China The Singapore Exchange (SGX) introduced an ESG Securities Regulatory Commission (CSRC), an- reporting timeline (2016–2019) on 31 December nounced in 2018 that environmental information 2017. Sustainability reporting is on a “comply or disclosure would be compulsory for all listed explain” basis, with the first sustainability report companies by the end of 2020. Currently, the made mandatory in 2018 and subsequently be- only companies required to make environmental fore July of each calendar year. Since last year disclosures are those included in sustainable indi- more content reporting has been required, includ- ces like the SSE Corporate Governance Index, ing a materiality assessment and the requirement companies in the Shenzhen 100 index, compa- to set targets with a “comply or explain” guide- nies issuing shares both on- and offshore, and line. Sustainalytics reports that almost half of the financials. exchange’s 200 listed companies have achieved strong ESG reporting status. Hong Kong Thailand In 2016, the HKEX (Hong Kong Exchanges and Clearing Market) introduced the “comply or ESG reporting began in 2012 and continuously explain” principle for reporting ESG disclosures. improved from 2014–2018, with consultants re- In January 2019, ESG disclosure requirements viewing standards. Thailand has been ranked in were further upgraded to require a more stan- the top ten globally for disclosure rates. Signifi- dardized reporting template. Five key perfor- cantly, in January 2019, the Thai Government mance indicators were introduced: key air pollut- Pension Fund became a signatory of the PRI and ants, greenhouse gas emissions, hazardous actively promotes an ESG network connecting waste production, non hazardous waste produc- the regulator, stock exchange and social security tion and measures to mitigate emissions. In May fund. Thailand offers an example of where top- 2019, the HKEX issued a consultation paper re- down and bottom-up approaches have dove- viewing the new ESG reporting guide and tight- tailed nicely. ening the reporting time line.

Shifting Asia: Sustainable investment in Asia – September 2019 23 Chapter 3 – Asian regulators drive sustainable investing

Green building in Ho Chi Minh City, Vietnam Gettyimages

India Vietnam

In India, it has been mandatory since 2012 for Despite its status as a “frontier market,” Vietnam the top 500 listed companies to publish Business established guidelines for disclosing corporate Responsibility reports as part of their annual re- responsibilities in 2016. Most ESG reporting is porting requirements. Eight-seven percent of re- based on a “comply or explain” basis, whereby porting provisions in India deal with environmen- companies either disclose sustainability reports or tal issues. Although there have been no new justify their decision not to do so. requirements to ESG reporting in India, there has been a gradual improvement in the quality of re- ports – yet challenges remain.

24 Shifting Asia: Sustainable investment in Asia – September 2019 Floating solar power plants, Jamakura dam, Japan Gettyimages

Shifting Asia: Sustainable investment in Asia – September 2019 25 This interview contains views which originate from outside Chief Investment Office Global Wealth Management (CIO GWM). It is therefore possible that the interview does not fully reflect the views of CIO GWM.

Interview with Fang Eu-Lin, Partner at PwC Singapore

Eu-lin leads the Sustainability and Climate Change Advisory department at PWC Singapore, where she is a partner. Her key projects include stewardship standards, sustainable development goals, climate scenario studies, and carbon tax regulations in Singapore and in the region.

What will be the major development in ESG How would you assess the current state of reporting in Singapore in 2019 and what ESG investing in Singapore, especially relative share of SGX listcos are expected to deliver to the rest of Asia ex-Japan? ESG reports? The adoption of ESG investing is still seen to be SGX has required all listed companies to produce at a fairly nascent stage in the Asia ex-Japan mar- sustainability reports since 2017. Based on my ket. A 2016 report by AVPN found that less than observation, most companies are complying with 1 percent of funds in Asia ex-Japan have lever- SGX sustainability reporting requirements and aged ESG investing, compared to 53 percent in the trend is likely to continue. My sense is that Europe. listed companies in Singapore are becoming in- creasingly comfortable and confident in disclos- Since then, a number of interventions, such as ing ESG-related information. However, I would the SGX requirements, have spurred ESG invest- say that the trend is weighted more to the larger ing and green finance in Singapore and the re- listed companies. gion. The bottom line is that investment compa- nies play a powerful and important role in In terms of other notable sustainability related encouraging funds to become more sustainable developments in Singapore, implementation of businesses. the carbon tax on “large emitters” is one of the key developments stipulated for 2019. This is It is interesting to note that in a recent WWF re- likely to drive more environmental reporting port, among the 35 ASEAN banks assessed, only across upstream industries. the three Singapore banks and a Thai financial institution met at least half the criteria for ESG While this carbon tax will directly impact large integration. emitters, the effects might ripple down the value chain. This would be the first time that compa- Would the MAS consider investing according nies feel the transitional risks of climate change to ESG principles in the manner of the GPIF (e.g. steeper energy costs), which may encourage in Japan? Do you believe the success of SI them to better understand the extent of their en- investing in Asia requires a top-down rather vironmental footprint and how to reduce it. than bottom-up approach?

Another development may be greater reporting Generally, the Monetary Authority of Singapore standards on packaging waste in relation to the (MAS) has been supportive of promoting the upcoming Extended Producer Responsibility (EPR) ESG agenda in Singapore. The Association of regulations in Singapore. Banks in Singapore (ABS) launched the “ABS

26 Shifting Asia: Sustainable investment in Asia – September 2019 This interview contains views which originate from outside Chief Investment Office Global Wealth Management (CIO GWM). It is therefore possible that the interview does not fully reflect the views of CIO GWM.

Guidelines on Responsible Financing” in 2018. What is the status of green finance in Another case in point is the Green Bond Grant, Singapore and what might its role be in and more support may be provided in the future. elevating sustainable investing?

In my view, the success of SI can be both driven Green finance has picked up in Singapore. Over from the top and from the groundswell. The big the last year, we have seen a number of invest- issue is that we have lots to do to address cli- ments in this space using various innovative mate change before it is too late. There are other mechanisms such as green bonds, green loans large issues to prioritize as well, as deftly summa- and sustainability loans. Green finance plays a rized in the 17 UN Sustainable Development crucial role as it allows investors to view sustain- Goals. Funds need to be directed to companies ability issues from an opportunity lens, rather that can solve these existential issues. than from a risk perspective. Whether it is invest- ments in clean technologies or circular solutions, If we want to move faster, a more top-down ap- green finance opens doors to sustainable invest- proach would be more effective, but this can be ments, which will in turn help solve some of our seen, if not careful, as draconian. Therefore, a present existential issues. top-down approach would need to be ambitious but offer some flexibility or support from other quarters.

Of course, if the groundswell moves quickly, that’s a good way too.

Shifting Asia: Sustainable investment in Asia – September 2019 27 Chapter 4 Climate change creating sustainability awareness in Asia

“I’ve starred in a lot of science fiction movies, and let me tell you, climate change is not science fiction…” Arnold Schwarzenegger Actor

Aerial view of a two lane road washed away from storm floodwater  Gettyimages

28 Shifting Asia: Sustainable investment in Asia – September 2019 Chapter 4 – Climate change creating sustainability awareness in Asia

Much of the recent regulatory developments in In the modern age, greater connectivity and real ESG reporting in Asia have been driven by an time data have given the public greater access to emphasis on the “E” (environment). This is particu- information related to climate change. As a result, larly evident in the ESG key performance indicators expectations and pressure on governments have introduced by the HKEX and China’s enforcement risen. Citizens’ clean air concerns in several Asian of environmental disclosure reporting by 2020. countries that have rapidly urbanized are a clear As highlighted by Natsuho Torii from the Japan example of this trend, particularly in China. Asian Exchange in her interview on page 18, an impor- sovereign wealth and pension funds, many of tant catalyst at play here has been the Task Force which have recently become signatories to the on Climate-related Financial Disclosures (TCFD). PRI, pay greater attention to the TCFD because of Founded in 2015, the TCFD published its first their long-term investment horizons. In Singapore, recommendations in 2017 and is supported in Asia the government has undertaken an SGD 100bn by the governments of Hong Kong, Singapore and (USD 72.7bn) initiative to mitigate the dangers of Japan, all of which are island economies. rising sea levels. This has created considerable awareness of the issue for sovereign wealth fund According to the TCFD, forecasted delays in tack- GIC and investment firm Temasek, which will be ling the climate change challenge could globally partly responsible for the initiative’s funding4. cost companies USD 1.2trn over the next 15 years.3 We believe this message has particularly In 2016, the Asia Investor Group on Climate high resonance in Asia, where 1.77bn people re- Change (AIGCC) was founded in Singapore. The side in just 10 major river basins which generate AIGCC comprises 32 asset owners and managers GDP of over USD 4.3trn4. The TCFD currently re- and engages companies in Asia to raise local ceives support from global financial institutions, awareness of climate change issues. In 2017, which collectively claim AUM of USD 118trn. As a AIGCC together with four partners launched result, an Asian corporate with a high exposure Climate Action 100+, a five-year initiative focused to climate-related risks is now more likely to on getting the world’s leading 100 corporate translate into the climate-related risk profile of a greenhouse gas emitters to improve governance global asset owner or manager. And while cli- and strengthen climate-related financial disclo- mate change risk relating to the classic definition sure. Twenty percent of the listed companies are of rising sea levels is important for Asia’s island Asian. economies and coastal megacities, the near-term transition risk – i.e. the global shift to a low- Rising engagement by such institutions translates carbon world – may constitute a greater threat into a greater awareness by Asian companies to to unprepared corporates. Thus, a bank providing address climate issues and engage the TCFD. This loans to coal-fired power plants or non-electric is the backdrop against which Asian regulators car manufacturers could see both their own TCFD have been strengthening their ESG disclosure re- risk profile as well as that of their shareholders quirements and corporate stewardship codes in impacted too. Similarly, policy shifts away from recent years. The Strategic Framework for Green single-use plastics set in Europe or elsewhere Finance released by Hong Kong’s security regula- could impact Asian supply chains, potentially cre- tor (SFC) in September 2018 mentions prioritizing ating “stranded assets” and elevating the TCFD the enhancement of “listed companies’ reporting risk of related companies and investors. These of environmental information emphasizing cli- TCFD risk concerns, as demonstrated by the mate-related disclosure, taking into account the quote from HKMA Head Norman Chan on page Mainland’s policy direction to target mandatory 20, also partly explains the strengthening of cor- environmental disclosure by 2020, and aiming to porate stewardship codes across the region. align with the TCFD recommendations.”

2 2019 Status Report, TCFD 4 Source: “Today,” September 2019 3 CWR “No Water, No Growth,” September 2018

Shifting Asia: Sustainable investment in Asia – September 2019 29 Chapter 5 Infrastructure spending and green financing as major SI drivers

“Clear waters and green mountains are as valuable as mountains of gold and silver” Xi Jinping Paramount Leader, China

Rice terraces in Guilin, China Sam Balye, Unsplash

30 Shifting Asia: Sustainable investment in Asia – September 2019 Chapter 5 – Infrastructure spending and green financing as major SI drivers

Infrastructure spending as key source for of a nation’s carbon footprint, making transition green finance growth risk management critical for Asian infrastructure The recent sharp growth of green finance initia- planning. With emerging market infrastructure tives in Asia has been driven by large-scale infra- spending set to comprise two thirds of the global structure spending both in Asia and through total by 20257, and China championing many China’s Belt & Road Initiative in global emerging low-carbon emission initiatives such as clean en- markets. Because infrastructure projects are long ergy and electric vehicles, there is considerable term by nature, there is a need to address the pressure to address low-carbon considerations in impact of climate change and transition risk, all aspects of Asian and emerging market infra- both in project construction and operation. This structure planning. This creates sizable opportuni- offers Asia a unique opportunity to grow scalable ties for the growth of green finance markets. green finance markets as part and parcel of its late-mover infrastructure rollout bid in a low-car- In a low-carbon world, capital investment in in- bon world. We forecast that the annual green frastructure evaluates the whole life value of the finance opportunity in Asia, based on addressing asset rather than the minimum build-out cost. the climate and transition risks of annual infra- This entails low-carbon considerations not only in structure spending needs, could reach USD project design and use of construction materials 200bn annually by 2030. Were it exclusively but also in the functionality and operating life of financed by green bonds, it would represent a the asset8. Examples of low-carbon design across four-fold increase of Asia’s current annual green the whole life value of an infrastructure project bond issuance. include water treatment plants able to generate energy by harnessing the effluent flow under According to the Asian Development Bank (ADB), treatment, thereby minimizing the asset’s carbon Asia will require an annual investment of USD footprint, and railway tunnels with greater diam- 1.7trn a year in infrastructure from 2016 to 2030 eters to improve energy efficiency of trains pass- just to sustain current economic growth levels5. Of ing through and capturing thermal energy for this sum, an estimated 16%, or USD 272bn per use in overhead buildings. In both cases, initial year, is needed for climate adaption and mitiga- investment costs are recovered through energy tion measures. The UN Framework Convention on savings over the long term. Climate Change points out that Asia, due to its large population, frequent natural disasters, rapid China’s green bond market “Big Bang” urbanization and vast migration to coastal cities, Green financing refers to a financial instrument, is highly vulnerable to climate change. The ADB such as bank loans, bond issues and equities, un- cites that natural disasters cost the Asia-Pacific der contract to a firm that can be exchanged for region USD 76bn a year from 2007 to 2016, positive environmental impact. Green financing in double the annual cost of the previous decade. China has been government-driven and has in- Without major investments in protective infra- volved mobilizing bank lending into green sectors, structure or relocation, up to 100m people would restricting bank lending in overcapacity industries be directly affected. The UN recommends building like steel and coal mining, and encouraging green an increasing resilience into infrastructure upfront bond issuance and green bond funds. at the design stage rather than later6. China’s 13th Five-Year Plan (2016–2020) outlines To meet the Paris Agreement’s goal of limiting a series of reforms for greening China’s eco- the rise of global temperatures, the treaty cites nomic development, forecasting an estimated that the world will need to attain zero CO2 emis- USD 274–468bn in green financing require- sions by 2050 from current annual levels of one ments9. In 2016, the People’s Bank of China gigaton. Infrastructure often comprises up to half issued Guidelines for Establishing the Green

5 Refer to UBS CIO Longer Term Investments: Emerging 7 Refer to UBS CIO Longer Term Investments: Emerging market infrastructure, dated 10 September 2019 market infrastructure, dated 10 September 2019 6 “What does climate change mean for Asia’s Future 8 Source: “Supply Chain Perspectives, Design Construction Infrastructure?” Asian Development Bank, June 2017 and Supply,” Dr. Heleni Pantelidou, Arup, CCC Summit 2018 9 New Climate Economy, 2017 “The knowns and unknowns of China’s Green Finance”

Shifting Asia: Sustainable investment in Asia – September 2019 31 Chapter 5 – Infrastructure spending and green financing as major SI drivers

Financial System, which call for a unification of addressing the trading of green bonds, indices green lending and bond standards, environmental and derivatives. In May 2019, the HKMA fol- data disclosure, mandatory pollution liability insur- lowed up with key measures on sustainable ance, new carbon finance products and interna- banking and green finance. As the HKMA’s Kim tional cooperation under the G20 framework. Chong mentions, the HKMA has pledged to em- ploy ESG factors into its own bond investment as Since entering the green bond market in 2016, well as to grow green bond portfolios and estab- green bond issuance in China has soared with lish a Center for Green Finance. Hong Kong has USD 86bn of bonds outstanding in 2018. In- raised a total of USD 5bn from 13 green bonds deed, within a space of three years, China has issues with plans for a USD 12.7bn (HKD 100bn) become the second largest green bond market green bond program to encourage more Chinese globally with 18% market share, just 2 percent- offshore issuances. It has become Asia’s fourth age points behind the US (“Emerging market latest green bond issuer after Japan, mainland bonds: Invest sustainably with EM green bonds,” China and South Korea. UBS CIO, 14 June 2019). In Singapore, the regulator has also been speed- Internationally aligned Chinese green bonds, in- ing up the development of the nation’s green cluding HK panda bonds (USD 208m), totaled bond market. The Monetary Authority of Singa- USD 31bn in 2018. This, in our view, creates a pore (MAS) has estimated that the ASEAN (Asso- good investment opportunity for international ciation of Southeast Asian Nations) countries will investors seeking exposure to China. require USD 200bn in annual green investment through to 2030 and estimates private finance Green bond issuance in Asia Pacific reached USD will fund half of this figure. In June 2017, the 50bn in 2018, largely because of China, and has MAS launched the Green Bond Grant Scheme, strong growth potential on the back of regional an SGD 100,000 rebate program to cover up- infrastructure spending, in our view. Asian finan- front costs to obtain external certification re- cial hubs Hong Kong and Singapore have been quired by issuers to show that bond funding quick to seize the initiative with the establish- projects are “green.” The MAS reports SGD 2bn ment of key green finance legislation to establish in green bond issues since 2017. A year earlier, themselves as green finance centers. the Singapore Stock Exchange introduced its “comply or explain” sustainability reporting Green bonds as catalyst for Hong Kong and requirement. (Refer to the Singapore section in Singapore green finance frameworks “Asian regulators drive sustainable investing” In September 2018, Hong Kong’s SFC published chapter on page 23.) a Strategic Framework for Green Finance

Fig. 4 China still the dominant force in EM green bond issuance China accounts for 18% of global issuance (in USD bn)

200 175

150

125 100 75 50 25 0 2015 2016 2017 2018

Other countries issuance (aligned with international de nitions) China’s issuance (aligned with both Chinese and internatinal de nitions) China’s issuance (aligned with Chinese de nitions only)

Source: China Green Bond Market 2018, UBS

32 Shifting Asia: Sustainable investment in Asia – September 2019 Chapter 5 – Infrastructure spending and green financing as major SI drivers

“Greening the belt and road”: A green finance platform for emerging markets

“We need to work with the international finance community to encourage private investment in BRI” Dr. Ma Jun Chair, China Green Finance Committee

The Belt & Road Initiative (BRI), a Chinese infra- China’s recent incursion into infrastructure projects structure program for developing countries that in Western Europe, particularly Italy, has exposed it has spent close to USD 60bn since launch in 2013, to stringent environmental and sustainable finance underwent a major revision in April 2019 at the requirements for infrastructure imposed by the EU. Second Belt and Road Forum in Beijing. The revi- In April 2019, China launched a debt sustainability sion responds to growing international concern framework modelled on the World Bank and IMF over debt servicing and related corporate scandals in a bid to attract greater cooperation from multi- that have emerged in some BRI countries10. lateral institutions, deflect criticism of debt diplo- macy and enhance the credibility of its BRI lending Although BRI spending by the Chinese govern- programs. ment has to date only reached USD 59bn, ac- counting for just 13% of annual overseas direct China’s own domestic carbon reduction policies investment, we believe it has potential to grow strongly commit it to “greening the BRI,” no less considerably in light of the ADB’s emerging mar- because the sixty-plus countries of the BRI (ex- ket infrastructure spending projections (USD cluding China) account for around one quarter 5.5trn by 2025). China has voiced the view that of global CO2 emissions. This share could double it would like to see greater involvement of multi- by the middle of the century if BRI countries’ lateral banks and international private capital to GDP growth rates rise to double the rate of expand an existing BRI funding capacity of CNY OECD countries, as has been forecast11. With 200bn mainly from state development banks and China currently operating the world’s largest car- funds. This is seen as a move to both raise the bon-trading exchange since launch in 2017, it is credibility and sustainability of its infrastructure strongly positioned to help BRI countries set up spending, i.e. “greening” it, as well as to diver- carbon exchanges and allow them to trade on sify the investment risk of its projects. China’s national exchange.

10 “China’s reboot of the Belt and Road Initiative,” 11 “A Low Carbon Belt and Road,” Ma Jun, Simon Zadek, Economist Intelligence Unit, July 2019 The Asset, March 2019

Shifting Asia: Sustainable investment in Asia – September 2019 33 This interview contains views which originate from outside Chief Investment Office Global Wealth Management (CIO GWM). It is therefore possible that the interview does not fully reflect the views of CIO GWM.

Interview with Pat-Nie Woo, Partner, KPMG, Hong Kong, Business Reporting and Sustainability

Pat Woo is a partner at KPMG Hong Kong and responsible for business reporting and sustainability. In his role, he leads a working group in the Financial Services Development Council (FSDC) and produced FSCD Paper No.6 “Environmental, Social and Governance (ESG) Strategy for Hong Kong,” which called for HK government public funds to integrate ESG into their investment decisions. All six of the proposed recommendations in the report have been implemented by Hong Kong’s regulators.

What was the motivation behind the FSDC today, as issues such as climate change will lead Paper no.36 to Hong Kong regulators in to major changes in regulations that will impact 2018? Does Hong Kong still lag the rest of business models across the board. the region in terms of ESG disclosure and reporting standards in your view? Why is it We are hoping the moves by the Hong Kong important for Hong Kong to catch up? government and regulators will have a similar impact as what happened in Japan, where the The working group I chaired held the view that market grew from USD 8 billion to USD 2 trillion Hong Kong needed to develop the ecosystem from 2014 to 2018 after the government pen- and market for sustainable finance. We needed sion fund announced they would consider ESG in a “why” for companies to want to do well in their investment decisions. ESG. As such, the main focus of the paper was to ask the largest asset owners in Hong Kong, We are already seeing shifts in the investment the Hong Kong government and related funds, management industry’s perception of ESG after to consider ESG in their investment decisions. a flurry of announcements made by the HKMA, We felt that moves by invested capital, such as SFC and HKEx in the past six to nine months. So the HKD 4 trillion Exchange Fund managed by it is definitely shifting in Hong Kong. the Hong Kong Monetary Authority, would cata- lyze the market and begin the process of devel- There has been some pushback by HK listed oping the sustainable finance market. Similarly companies against the new mandatory ESG for the Mandatory Provident Fund (Hong Kong’s disclosure consultation paper released in pension fund), which has close HKD 1 trillion, we May 2019. Some companies claim that thought the trustees could also integrate ESG in disclosure is often not relevant to them. Is their investment decisions. this a setback in your view?

While drafting the paper, we felt we had com- I think there may be some misunderstanding with prehensive proof that integrating ESG criteria has regard to the required disclosures linked to key a positive impact on organizations’ financial per- performance indicators. In 2016, the Hong Kong formance and cost of capital. So in the long Exchange (HKEX) introduced the “comply and ex- term, investors can use it as a risk mitigation and plain” principle for ESG disclosures, which still re- yield-enhancement tool. This is particularly true mains relevant under HKEX’s new ESG reporting

34 Shifting Asia: Sustainable investment in Asia – September 2019 This interview contains views which originate from outside Chief Investment Office Global Wealth Management (CIO GWM). It is therefore possible that the interview does not fully reflect the views of CIO GWM.

guideline. Thus, if a required disclosure like “haz- ESG practices improved a company’s operating ardous waste production” is not “material” to a performance and another 80% showed a posi- listed real estate investment trust, for example, tive influence of good sustainability practices on then it’s a matter for the company to point this the performance of shares. C-suite executives out or “explain” why not. However, you have a need to consider their ESG approach as a funda- problem if a fashion retailer explains that disclo- mental governance issue. There is a direct link sure of supply chain management is immaterial. for companies that manage their ESG and having Part of the goal of the new ESG reporting guide- good governance. lines is to make company boards consider, assess and create awareness of what might be relevant “Greening the Belt and Road Initiative” to their organization in ESG terms. In this sense, seems to be a campaign that is gathering the dialogue that has emerged with listcos on the some momentum. Can this help elevate ESG back of the HKEX’s May consultation paper is a investing in Hong Kong? positive development. The Belt & Road Initiative (BRI) certainly has po- Listed companies in Asia often are not clear tential to raise greater awareness of ESG compli- on what benefits ESG disclosure reporting ance in Hong Kong because China understands brings to their company and share price. The that for BRI to work internationally, it needs to benefits often only become evident after recognize and uphold global standards. The investors have full ESG disclosure from the “Greening the BRI initiative,” which is a joint UK- company. How to break out of this chicken China project, has partly emerged in response to and egg cycle? China’s engagement in European infrastructure and a result of the need to adhere to Europe’s I think the volume of creditable research on the commitment to mitigate the long-term environ- positive link between sustainable practices and mental effects of infrastructure roll out. For corporate performance demonstrates why corpo- China to attract private and international capital rates should address ESG issues relating to dis- to engage in BRI projects, it must adhere to strict closure reports. For example, a survey by BNPP green financing principles. And in order for Hong AM and University of Oxford of 200 studies Kong to be perceived as a trusted platform for fi- showed that 90% showed a positive link be- nancing BRI, it must demonstrate full commit- tween a company’s cost of capital and sound ment to sustainability principles. sustainability standards, 88% showed that solid

Shifting Asia: Sustainable investment in Asia – September 2019 35 Chapter 6 Investment implications

“The United States and Asia are similar when it comes to having conversations about ESG. They only want to look at how it affects their ability to make money or lose it” Joy Frascinella Head of PR, PRI

Burnt down rainforest in the island of Borneo (Kalimantan) of Indonesia Gettyimages

36 Shifting Asia: Sustainable investment in Asia – September 2019 Flood in Thailand Gettyimages

Sustainable investing and performance

As the above quote by Joy Frascinella suggests, industries from portfolios not aligned with an a contributing factor to the shifting mindset investor’s value) and “integration” (the integra- toward sustainable investing in Asia is the rising tion of ESG principles in the investing process to body of recent works and studies showing that it improve portfolio risk and return) showed no sys- does not compromise financial performance. tematic bias, suggesting that SI performs no bet- Moreover, it has been argued that SI can en- ter or worse than conventional approaches. hance financial returns12. When faced with two investment options with similar risk-return characteristics, we believe it Fig. 5 suggests that the majority of studies on thus makes sense to prioritize the one with the sustainable investing that incorporate both superior ESG profile, as the HKMA’s Kim Chong “exclusion” (the exclusion of companies or points out in his interview on page 12.

12 Refer to UBS CIO report: Sustainable value creation in emerging markets, dated 12 July 2016

Fig. 5 Academic studies show no systematic underperformance of SI strategies Number of surveyed studies with positive, negative or neutral conclusion regarding SI performance versus conventional strategies

Exclusion and integration

Integration-oriented studies

Exclusion-oriented studies

025 10 15 20 5

Positive Negative Neutral

Source: UBS

Shifting Asia: Sustainable investment in Asia – September 2019 37 Chapter 6 – Investment implications

Incorporating sustainable investment strategies With Asian emerging markets accounting for in emerging markets, however, has been shown nearly three quarters of the capitalization of the to deliver comparable and potentially better fi- MSCI EM Index and 85% of the MSCI Asia nancial performance than traditional invest- ex-Japan Index, one might expect similar ESG ments. Over the last 10 years, the MSCI EM ESG performance results for Asia. Indeed, the MSCI Leader Index (a benchmark for sustainable in- Asia ex-Japan ESG Leaders Index has enjoyed an vesting) has outperformed the MSCI EM bench- annualized excess return of 2.0% over the mark with an annual excess return of 3.2% (re- benchmark since 2007 (see Fig. 7). fer to Fig. 6). According to RiskLab, this can be attributed to a much higher dispersion in emerg- ESG is becoming an increasingly important part ing markets between leading and lagging ESG of the investment approach of asset owners with performance when compared to developed mar- long-term investment horizons, such as pension kets13. Additionally, evidence supports that the funds and insurance companies, and of family of- prevalent risk of poor corporate governance fices focused on wealth preservation (refer to UBS among EM companies results in those companies CIO publication “Liquidity. Longevity. Legacy.” with consistently strong corporate governance September 2018). Indeed, the Official Monetary being disproportionately rewarded by the market and Financial Institutions Forum (OMFIF) has due to lower tail risks.

13 Source: Hoerter, 2015 ESG in equities

Fig. 6 Fig. 7 MSCI EM ESG Leaders Index has outperformed MSCI Asia ex-Japan ESG Leaders Index performance the EM benchmark since the nancial crisis vs. regional benchmark re ects its large 250 emerging market weighting 250 200

200 150

150 100

100 50

50 0 11 17 12 13 15 18 14 16 10 07 09 08 0 p- p- p- p- p- p- p- p- p- p- p- p- Se Se Se Se Se Se Se Se Se 11 17 12 13 15 18 14 16 10 07 Se 09 Se 08 Se p- p- p- p- p- p- p- p- p- p- p- p- Se Se Se Se Se Se Se Se Se Se Se MSCI EM Se

MSCI EM ESG Leaders MSCI Asia ex-Japan

Source: MSCI, USD NTR, UBS, as of July 2019 MSCI Asia ex-Japan ESG Leaders

Source: MSCI, USD NTR, UBS, as of July 2019

38 Shifting Asia: Sustainable investment in Asia – September 2019 Chapter 6 – Investment implications

stressed the importance of ESG considerations for with better operational performance, and 80% long-term capital preservation across the entire of studies indicate that stock price performance asset management industry. is positively influenced by good sustainability practices (refer to Fig. 8). From a corporate perspective, incorporating ESG considerations into management decision-mak- ing can improve operational performance and capital returns, a major motivation for its intro- duction in Japan. KPMG’s Pat Woo suggests (re- fer to interview on page 34) that management adoption of ESG in itself is perceived externally as a sign of strong corporate governance. A study by the University of Oxford and Arabesque Asset Management showed that 90% of studies demonstrate that sound ESG standards can lower a company’s cost of capital, 88% of studies positively correlate solid ESG practices

Fig. 8 Corporate sustainability and pro tability are interrelated

88% 80%

According to 88% of the studies According to 80% of the studies “solid ESG practices result “stock price performance is in better operational performance”. positively inuenced by good sustainability practices”.

Source: “Corporate Sustainability and pro tability are interrelated”, Smith School of Enterprise and the Environment, University of Oxford, Arabesque Asset Management, UBS

Shifting Asia: Sustainable investment in Asia – September 2019 39 Red alert for air pollution: people on the street wearing protective masks Gettyimages

Sustainable investing developing its own narrative in Asia

Sustainable investing is developing its own narra- considerable given that air pollution has been tive within the Asian investment community and linked to disproportionately high cases of lung the broader public. The environmental element of cancer. China reported 730,000 incidences of lung ESG has the greatest resonance because of climate cancer in 2015, almost 36% of total global inci- change risk and clean air issues, which Asia’s city dences. Governments, like China’s, are attempt- dwellers confront on a daily basis. This is the result ing to address the problem by clamping down on of breakneck urbanization and mass migration to coal-fired pollution and vehicle emissions and have cities. Asia’s high internet penetration and the achieved some tangible measures of success in transparency of air quality data online and in social recent years14. As a result, low carbon and green media have created huge citizen awareness and financial products have been well received in the criticism of government management of air quality Chinese market and other parts of Asia. This also issues. In some countries, these have raised deeper explains the exponential growth of the onshore political concerns. In China the sensitivities are green bond market in China. Interestingly, as

14 Source: “Shenzhen: China’s sustainable city,” UBS Global Topics, 20 May 2019

Fig. 9 Millennial asset ownership is growing rapidly USD 24 trillion of global assets will be owned by millennials in 2020

USD 24 trillion

USD 16.9 trillion

2015 2020

Source: US Trust Insights on Wealth and Worth Survey, US Trust, BOML, UBS, as of 2016

40 Shifting Asia: Sustainable investment in Asia – September 2019 Chapter 6 – Investment implications

Young team of entrepreneurs in their office as part of a start up company in Hong Kong  Gettyimages

highlighted by Eu Fang-Lin in her interview, green millennials have high expectations of products finance allows investors to view sustainability from and services and prize their online privacy. They an opportunity lens rather than a risk perspective, are likely to be critical of companies producing an interesting feature of where investment poor quality, adulterated or fake products, or appetite in this field lies. those whose services “compromise online pri- vacy for convenience.” In our view, as their in- A positive attitude toward sustainability in invest- come grows, millennials will undoubtedly be- ing is often attributed to the rise of the millennial come a greater source of pressure on companies generation (those born between 1982 and and regulators to improve governance practices 2004). They are portrayed as digital natives with in China. Globally, around USD 23trn of global greater awareness of social and environmental is- assets will be in millennial hands by 2020, ac- sues. A study on China’s millennials and ESG by cording to a wealth survey by the US Trust and Sustainalytics15 demonstrated that Chinese BOML (refer to Fig. 9).

15 Source: 14 August, 2019, “China’s Millennials and ESG,” Frank Pan, Sustainalytics

Fig. 10 Millennial investors have high interest in social impact investing In %

90 52% of millennials interested or 75 52% very interested in social impact investing

60 37%

45 29%

30

15 28% 17% 10% 0 MillennialsBGen X aby Boomers

Have made social impact investments Interested in social impact investing

Source: US Trust Insights on Wealth and Worth Survey, US Trust, BOML, UBS, as of 2016

Shifting Asia: Sustainable investment in Asia – September 2019 41 How to invest?

Different motivations to engage in sustainable These strategies can be implemented through investing point to different investment strategies. individual asset classes or through a portfolio Sustainable investors are typically unwilling to approach16. ESG integration and exclusions are sacrifice returns in order to achieve their sustain- generally applied to liquid assets such as equities ability goals. The table below summarizes the and bonds. Popular sustainable equity strategies different sustainable investing strategies as de- include best-in-class (also known as ESG leaders fined by UBS: like the MSCI Asia Pacific ESG Leaders Index), thematic equities (e.g. water, clean tech, gender Given the classification in the table, in our view, focus, agriculture) and ESG momentum. On the investments can generate impact through three fixed income side, corporate ESG leader bonds and main channels: green bonds are most widely used. Most of these sustainable investment asset classes are offered in 1. Financing: By directly financing intrinsically Asia, although regional sustainable investments impactful companies or projects. Private eq- through a multi-asset portfolio approach have only uity or direct investments are good examples. recently started to emerge in Asia.

2. Stewardship: By engaging with management Impact investment has traditionally been under- to persuade companies to adopt more sus- taken through illiquid market assets such as pri- tainable practices. Provided that the effect of vate equity and direct investments, as there is a these efforts can be measured and traced clearer link between the investment and the back to investors’ actions, this can be consid- measurable social and/or environmental impact. ered impact investing. Impact investing in liquid markets is possible, not so much through the investment itself, but via 3. Signaling: By investing in companies that in- the mechanism of shareholder engagement (dia- vestors believe are having a positive impact on logue) and activism (filing shareholder proposal), people and the planet and divesting from which have a decades-long track record of deliv- companies that aren’t, investors can signal to ering positive change within investee companies. the market the importance of corporate ESG performance.

16 Source: UBS, “Sustainable Investing in Asia,” Envision Magazine, 2018

Impact investing Integration Exclusion

Investing with the Integrating ESG factors Excluding companies or intention to generate into traditional industries from portfolios Description measureable E & S investment processes to where they are not impact alongside a improve portfolio aligned with an nancial return risk/return investor’s values

Achieve environmental Improve the risk/return or social impact, in Align investments with Motivation characteristics of the addition to nancial personal values portfolio returns

42 Shifting Asia: Sustainable investment in Asia – September 2019 Appendix

Appendix

Fig. 11 Asia ex-Japan signatories to United Nations Principles for Responsible Investment In USD bn

3,500 120

3,000 100 2,500 80 2,000 60 1,500 40 1,000

500 20

0 0 2016 2017 2018 2019

Asia ex-Japan AUM (LHS) Asia ex-Japan signatories (RHS)

2019 refers to eight months to August 2019 Source: United Nations, UBS, as of August 2019

Fig. 12 Japan signatories to United Nations Principles for Responsible Investment In USD bn

9,000 80 70 7,500 60 6,000 50 4,500 40 30 3,000 20 1,500 10 0 0 2016 2017 2018 2019

Japan AUM (LHS) Japan signatories (RHS)

2019 refers to eight months to August 2019 Source: United Nations, UBS, as of August 2019

Shifting Asia: Sustainable investment in Asia – September 2019 43 Glossary

ASrIA The Association for Sustainable & Responsible Investment in Asia was a non-profit, membership association dedicated to promoting sustainable finance and investment in the Asia-Pacific region from 2001 to 2015 and has now completed its integration into the PRI with the establishment of PRI Association (Hong Kong) Limited

CG – corporate governance Corporate governance is the system of rules, practices and processes by which a firm is directed and controlled, balancing the interests of a company's many stakeholders.

CSR – corporate social responsibility Corporate social responsibility is a self-regulating business model that helps a company be socially accountable – to itself, its stakeholders and the public.

ESG – Environmental, Social, ESG refers to three key factors for evaluation to assess the sustainability of an Governance investment. Topics include: Environmental – Climate change, pollution and waste, environmental opportunities; Social – Workplace safety, discrimination and diversity, supply chain, community controversies, human rights; Governance – Corruption, tax gaps, anti-competitive behaviour, business ethics, board structure.

Exclusion This investment approach involves excluding individual companies or entire industries from portfolios if their areas of activity conflict with an investor’s personal values.

HKGFA – Hong Kong Green Finance The HKGFA comprises members from financial institutions and green businesses in Association Hong Kong to provide policy suggestions to the HKSAR government and other regulators in developing green finance in the city.

Impact investing Impact investing is one of three distinct sustainable investment approaches, made with the intent to generate measurable environmental and/or social impact as well as attractive financial returns.

Integration Integration is one of three distinct sustainable investment approaches that combines ESG factors with traditional financial considerations to make investment decisions.

PRI – Principles for responsible The PRI is the world’s leading proponent of responsible investment. investment

SI – Sustainable investing Sustainable investing is an investment philosophy with the intention to perform comparably to traditional investments, while at the same time having a positive impact on the environment and society.

SDG – Sustainable Development Goals The Sustainable Development Goals, adopted by all UN member states in 2015, frame the most pressing sustainability challenges facing the globe. There are 17 SDGs with 169 specific underlying targets, aimed at addressing poverty, inequality, climate, shared prosperity and peace and justice for all.

SSEI – Sustainable Stock Exchanges The SSEI is a peer-to-peer learning platform for exploring how exchanges, in Initiative collaboration with investors, regulators, and companies, can enhance corporate transparency – and ultimately performance – on ESG (environmental, social and corporate governance) issues and encourage sustainable investment.

TCFD Task Force on Climate-related The FSB TCFD develops voluntary, consistent climate-related financial risk Financial Disclosures disclosures for use by companies in providing information to investors, lenders, insurers and other stakeholders.

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UBS Europe SE, Luxembourg Branch is subject to the joint supervision of the European Central Bank (“ECB”), the German Central bank (Deutsche Bundesbank), the German Federal Financial Services Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht), as well as of the Luxembourg supervisory authority (Commission de Surveillance du Secteur Financier), to which this publication has not been submitted for approval. UBS Europe SE is a credit institution constituted under German law in the form of a Societas Europaea, duly authorized by the ECB. Mexico: This information is distributed by UBS Asesores México, S.A. de C.V. (“UBS Asesores”), an affiliate of UBS Switzerland AG, incorporated as a non-independent investment advisor under the Securities Market Law due to the relation with a Foreign Bank. 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It is distributed only for information purposes to clients of UBS Europe SE, Sweden Bankfilial, with place of business at Regeringsgatan 38, 11153 Stockholm, Sweden, registered with the Swedish Companies Registration Office under Reg. No 516406-1011. UBS Europe SE, Sweden Bankfilial is subject to the joint supervision of the European Central Bank (“ECB”), the German Central bank (Deutsche Bundesbank), the German Federal Financial Services Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht), as well as of the Swedish supervisory authority (Finansinspektionen), to which this publication has not been submitted for approval. UBS Europe SE is a credit institution constituted under German law in the form of a Societas Europaea, duly authorized by the ECB. Taiwan: This material is provided by UBS AG, Taipei Branch in accordance with laws of Taiwan, in agreement with or at the request of clients/prospects. 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Version 05/2019. CIO82652744 © UBS 2019. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved. Shifting Asia

UBS CIO’s Shifting Asia thought leadership series takes on the major trends shaping Asian markets and how they could impact investors over the next 5–10 years.

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