celebrating 30 years
Over the past 30 years, the Asia Pacific (APAC) region has been transformed though rapid economic development and massive wealth creation, lifting some 1 billion people out of poverty.

However, the region’s also responsible for most of the increase in global carbon emissions, as well as some of the most serious cases of biodiversity loss.

According to the United Nations, without an acceleration of reforms, APAC is likely to be more than three decades late in meeting the UN’s Sustainable Development Goals (SDGs).

The region is only on track to meet the 17 SDGs by 2065, some 35 years after the UN’s 2030 target. Slow progress on climate action is a key reason.

Three of our experts met recently in Singapore to answer some of the most pressing questions on sustainability, the status of sustainability in Asia and other related topics*.

Here’s how that discussion unfolded:

What are the SDGs and why are they important?

The Sustainable Development Goals were adopted in 2015 by all UN member states. They provide a blueprint to identify and address the environmental and social problems that are obstacles to more sustainable and equitable long-term growth.

Investors need to navigate these issues because many of the assets they invest in are exposed to three key sustainability concerns: climate change; unsustainable production and consumption; and worsening inequality. Companies don’t operate in a vacuum and these issues create risks that affect investors. [AY]

Companies don’t operate in a vacuum and these issues create risks that affect investors.

Why does Asia lag in achieving the SDGs?

First of all, it’s important to point out that slow progress towards the Sustainable Development Goals is a global problem, not just an Asian one. The bar for sustainable development is very high, the objectives aren’t easy to achieve, and the issues are often highly politicised. Most countries and regions have the scope to do much better.

Second, Asia has some unique characteristics that make it harder to achieve some goals. For example, on the issues of climate change and the energy transition, Asia’s fast growth has involved much greater increases in energy demand than other regions. Given the state of existing energy technologies that’s meant more fossil fuel usage.

So if you look at the different dimensions of sustainable development across the 17 major categories, those goals most closely linked to growth (e.g. education, health) have seen the greatest progress, while those associated with the negative by-products of growth (e.g. the environment) have retreated.

What Asia needs is to utilise the power of mixed capitalism to help address its sustainability problems. This means governments working hand-in-hand with the private sector, correcting market failures but also incentivising private investments with social returns. [JL]

Are countries’ COP26 pledges sufficient?

Countries around the world have announced various net-zero deadlines that range from 2050 to 2070. Unfortunately, there’s usually a big gap between the stated ambition and real credible action.

For example, carbon pricing is a very important way to help de-carbonise economies. But few jurisdictions in Asia make use of carbon taxes or emissions trading schemes. Only China really has a trading scheme, but it’s still in its infancy and Chinese emissions aren’t expected to peak until 2030.

We also need more partnerships across the region to see the necessary changes in the power, transportation, construction and agricultural sectors. The next 10 years will be critical. [JL]

What topics do clients want to talk about during sustainability meetings?

It depends, some investors in the region are just beginning their ESG journey while others are already very sophisticated. But one thing I would say is that climate is a key concern.

Conversations around biodiversity loss have also picked up recently. Other issues include diversity and inclusion, modern slavery and labour, while governance is always popular.

Some issues are very localised. For example, in Australia there are complex discussions over First Nations People’s rights and cultural heritage management.

Active ownership and engagement – data transparency and quality, whether to divest – is something that clients are very interested in. They also want to know how to build teams to deal with ESG issues, as well as to understand regulatory change (e.g. how to avoid greenwashing). [DWR]

Why is sustainability important from a bottom-up perspective?

Sustainability issues have investment implications we need to consider when we think about how to invest our capital, and these can be at a specific asset level.

So there will be sectors that are more exposed to the risks, such as the energy sector. But there’ll be others, such as utilities, that may benefit from initiatives to solve energy-transition problems.

There may be risks in the healthcare sector around drug pricing and accessibility to affordable medicine. But healthcare companies delivering mass access to medication, or targeting diseases that are overlooked by the large drug makers, offer opportunities (and positive outcomes for the environment and society). [AY]

What are the key sustainable investment misconceptions?

One misconception is that it’s just one investment style. In reality, there’s a whole range of ways you can do this – active, passive, listed, un-listed, global products, single-market products – representing different investment styles and philosophies.

Another misconception is that all the terminology means the same thing. But, for example, ESG integration (bottom-up risk approach) isn’t the same thing as ethical investing (including/excluding investments on the basis of values), which isn’t the same as impact investing (contributing to deliberate, positive and measurable change).

Probably the biggest misconception is the belief that ESG integration/sustainable outcomes and performance are mutually exclusive.

Although more research is needed, there’s a body of evidence suggesting that higher ESG scores may be linked to a lower cost of capital and better long-term performance. [DWR]

How do governments think about the costs and benefits of the energy transition?

The geopolitical environment that we find ourselves in, the fracturing of the global system into different blocs and alliances, is making the energy transition more difficult. It doesn’t mean we can’t make progress – there’s a lot that individual countries can do – but poor coordination does slow the necessary change.

That’s because many of the big problems that we face in the sustainability space are collective action problems. The planet doesn’t care where emissions come from. But if the world’s major countries are squabbling, it’s much less likely they’ll come together to solve these larger problems.

So if you look at last year’s COP26 meetings, the world fell far short of an agreement to deliver the amount of financing that’s needed to facilitate the energy transition in developing economies. [JL]

Is the financial sector doing enough in engaging with the energy sector to achieve net-zero targets?

I don’t think the financial sector is doing enough yet, although progress has accelerated. Financial sector engagement is still in its infancy (e.g. there are lots of data problems to solve), the world is still very dependent on fossil fuels, and decarbonisation is proceeding only slowly.

It will also be some time before we have the markers in place that could tell us whether a company’s pledge to go in a new direction is likely to be achieved.

So if you look beneath the headlines, high-level commitments to reduce carbon footprints made by financial institutions aren’t nearly enough, and are usually highly conditional on governments fulfilling their own pledges.

Of course, we shouldn’t be surprised because financial flows can’t be aligned with net-zero targets if national policies aren’t. The private and public sectors need to come together or we will miss these goals. [JL]

Why is biodiversity loss a serious problem for investors?

Most importantly, humans cannot survive as a species if there’s mass biodiversity loss. But as investors, every investment we make relies upon natural resources. Every company leaves a footprint on nature.

So we need to think about how those companies will continue to access natural resources when those resources are becoming scarcer.

Biodiversity is important because the healthcare sector has its foundations in using nature to find cures for diseases.

From a health perspective, we also need healthy environments from which to operate. In China, for example, one of the main reasons behind the shift away from fossil fuels is the impact on urban health from severe air pollution.

That said, there are opportunities to invest in solutions to biodiversity loss and to reduce, or even reverse, the damage that’s being done to ecosystems. [AY]

Will energy security drive the energy transition?

Most economies are still dependent upon fossil fuels. As the current energy crisis demonstrates, you can’t make a transition overnight because renewable energy cannot replace the shortfall from a sudden withdrawal of oil and gas supplies.

But policymakers need to be thinking about the future, not just about today. The balance that governments need to achieve is managing the short-term shock – putting in place policies that help households and businesses cope with higher prices, while reducing dependency on fossil fuels over time (especially imports) so that these crises are less likely to occur.

There are some people who argue that we should invest more in fossil fuels to prevent price spikes. However, energy price shocks have always been with us, including at times when the notion of climate policy didn’t even exist. [JL]

What should investors look for to distinguish good ESG opportunities from greenwashing?

You’re looking for that underlying detail, of evidence that ESG is integrated into investment processes. You need to speak to investment teams to understand what kind of grasp they’ve got on those issues.

When an investor talks about active ownership and engagement, you’re looking for evidence of those conversations not just happening, but that they’re really focused on outcomes and there’s an understanding of what those outcomes are. [DWR]

* Amanda Young [AY], Danielle Welsh-Rose [DWR] and Jeremy Lawson [JL], were taking part in a panel discussion at abrdn’s inaugural Sustainability Summit in Singapore on May 24. Responses have been edited for brevity and clarity.