Environmental, social and governance (ESG) investing has evolved from the rather straightforward approach of stock exclusion to more sophisticated and data-heavy frameworks. How investment firms are tackling this ESG data load is a key question. This research analyses the degree to which artificial intelligence (AI) is being deployed, how it is being used and what more it might do in the future for ESG investment decisions. Integral to that question is an investigation into the state, availability and integrity of ESG data in Asia. Big data has offered insight in many other business sectors and industries, but is Asia’s ESG data big enough yet to be meaningful?

The Economist Intelligence Unit surveyed decision-makers at a spectrum of large asset owners and institutional investors about their observations related to “impact” versus “income” goals and about sentiment on data quality. We also spoke to a range of experts on the same topics to study how AI technology may be changing the investment world, specifically with regard to improving ESG returns or impact.

The key findings are as follow:

The rise of ESG in Asia: some 95% of respondents believe that ESG investing is important to their firm, with the overwhelming majority saying it will be more so in three years. More than 80% believe ESG has a positive impact on returns.

ESG factor weighting: almost half of respondents said they weighted environmental, social and governance factors equally. For the remainder that didn’t, the individual most important factor was environmental, with mainland China’s increasing focus on such issues a major driver. About 90% of respondents feel that environmental and social issues will gain the same importance as governance within a decade.

Investors’ AI uptake: pension funds have the highest uptake of AI for ESG screening. There is, however, broad usage across all investor types and regions. A rapidly expanding range of AI techniques, drawing information from diverse sources, is being used to fill gaps in standard corporate disclosures.

Data quality and suitability: while there is broad satisfaction with available data, this is combined with recognition that gaps exist. Most investors are responding to such limitations by conducting their own research on the information available.

Looking forward: much ESG-related data are backwards-facing and cannot, therefore, identify ongoing change in corporate behaviour. The promise of adding AI to the equation is to get a more forward view. Analytics companies are developing models to flag behavioural shifts and experts stress that focusing on data only misses the importance of how it is framed—something that remains a very human decision.

Along with its wealth, Asia’s climate risks have been rising. Low-lying coastal cities are particularly vulnerable to climate change and regional population and economic centres—such as Bangkok, Ho Chi Minh City, Manila and Shanghai—sit upon that precipice. Yet in terms of green fixed income, Asia faces another risk: lack of issuance and uptake.

Fixed-income plays a significant role in climate mitigation because its market is about 60% larger than its equity cousin which still attracts more media and investor attention. Global issuance of green fixed income has increased markedly since its inception, reaching US$350bn in 2019. Still, the amount is only about 5% of the global fixed income market and represents just over a tenth of what needs to be raised to meet Sustainable Development Goals (SDGs) in emerging markets alone.

Efforts to make Asia’s finance greener have marked a transformative effect on the relationship between companies and investors. Conversations about sustainability that were absent a decade ago are now happening and have been central to helping the region come so far in such a short time: Asia’s banks and corporates have gone from 1% of green issuance in 2013 to 45% in 2019.

Still, not all is rosy (or green) as many obstacles remain. Asia’s green fixed income originates from a narrow base. China is the dominant market regionally and credit quality is largely confined to supranational institutions and investment-grade issuers. That is not enough. Other markets, such as high-yield, assetbacked securities (ABS) and private debt are, at best, in infancy. Furthermore, developedmarket investors tend to underweight Asia.

Green fixed income data is also a persistent challenge. A profusion of providers use a wide range of methodologies, many of which can be opaque and defy comparison. Investors face difficulties in determining those which best suit their needs. The vast amount of data that issuers are required to provide can also be a deterrent to going green; or worse, it leads to “greenwashing”, a vexing problem of questionable categorisation globally. The emergence of more consistent taxonomies is helping, but the patchwork of approaches still forms a barrier. Market practitioners interviewed for this paper did find agreement on green fixed income limitations, but they also showed optimism that recent developments in debt-products indicate a positive direction, even if the needle measuring progress has yet to move as far as it should.

From consensus, the region’s green fixed income progress depends on the development of a consistent taxonomy—not just in Asia, but globally—as well as better linkage of Paris Agreement goals to quantifiable key performance indicators (KPIs). The result could create better incentives for issuers and asset owners alike.

Have green bonds—as the largest green fixed income competent—been enough? Despite the interviewees’ breadth of experience and varied professional functions, they are almost entirely synchronised in their response to this question: “no”.

So what’s next?

Financing sustainability: Asia Pacific embraces the ESG challenge is an Economist Intelligence Unit report, sponsored by Westpac. It explores the drivers of sustainable finance growth in Asia Pacific as well as the factors constraining it. The analysis is based on two parallel surveys—one of investors and one of issuers—conducted in September and October 2019.

If the countries of Asia Pacific are to limit the negative environmental effects of continued economic growth, and companies in the region are to mitigate their potential climate risks and make a positive business contribution through improving the environment and meeting the UN's Sustainable Development Goals (SDGs), large volumes of investment in sustainable projects and businesses need to be mobilised. A viable sustainable finance market is taking shape in the region to channel commercial investor funds, and both investors and issuers say they are achieving a financial benefit from their investment and financing activities. The market is still in the early stages of development, however, and must expand and mature to meet investor needs.

The chief constraint on sustainable finance growth in the region has been the limited supply of bankable sustainable projects. Our research suggests supply is increasing, but with investor demand continuing to grow apace, the gap will remain an obstacle in the short- to medium-term. Among the organisations in our issuer survey, only 7% have used sustainable finance instruments to fund projects. However, nearly nine in ten (87%) said they intend to do so in the next year, which should begin to bridge the gap between supply and demand.

Based on issuers’ stated intentions, investors will have a range of instruments to choose from, including green loans and bonds and sustainability loans and bonds. Large numbers of investors indicate that they intend to deploy a greater proportion of capital to these over the next three years.