Asia Pacific now accounts for 35% of global GDP – exceeding the share of US and Europe – and in its aspirations has lifted millions out of poverty, but it’s also responsible for about 80% of the world’s coal consumption and up to 60% of CO2 emissions. This rate of economic development has no doubt came at an expense to the environment. While it could have been an inevitable trade off in the past, this can no longer be the case.
The radical impact wrought by the pandemic globally has sparked much-needed soul searching by governments and organisations. It has also exposed, despite tremendous economic strides, the vulnerabilities that the region continues to face. Environmental degradation has been linked as a cause for the outbreak, while the inability to suppress the human toll from infection surges has highlighted social divides.
Parallels drawn between the unforeseen risks of a pandemic and environmental issues, such as climate change, have served as a wake-up call, accelerating a rethink on the sustainability agenda and cast ESG issues at the forefront. The ADB estimates that Covid-19 has plunged 75-80 million in the region into poverty – a stark reminder that without intervention, the region risks unwinding years of economic progress.
Global epicentre of real assets
While the pandemic has disrupted growth trends in the region, the ongoing health crisis can still be looked at as just a blip against the backdrop of its long-term structural fundamentals – if it plays its cards right. The very drivers that have propelled the region as an engine of global growth can be harnessed and leveraged on, and building on the momentum from the pandemic recovery, spur the adoption of ESG agendas.
By 2030, seven of the world’s 10 largest megacities will be in the Asia Pacific region. It will be home to two-thirds of the world’s middle class and its urban population will expand by close to three billion. As the region becomes increasingly urbanised, its growing cities will require significant investments in real estate and infrastructure to build out of its urban core.
In tandem with this growth trend, APREA (Asia Pacific Real Assets) expects the stock of investable real assets in the region to more than double by the end of 2030 to US$40-45tn. Part of these will be driven by the region’s infrastructure stock, which will need to increase by close to 92% by the end of the decade to keep up with projected economic growth. The Asian Development Bank estimates that an additional US$2tn will need to be invested to the end of the decade to address climate change.
Institutionalising real assets
The expansion of the region’s listed real asset base represents a tremendous opportunity to engineer a green recovery. Securitised, listed vehicles are well placed to capture the opportunities from ESG tags. With an increasing proportion of assets held by such structures, it’s clear that securitisation has a big role to play in the ESG equation and fulfilling sustainability objectives.
Aside from the accelerated digitalisation of economies, the pandemic has also catalysed the securitisation trend in the region. With the ability to recycle capital, REITs, in the wake of the pandemic, are a vital economic revival tool. Governments are prioritising support, fast tracking plans to establish the necessary framework. So far, the progress has been rapid.
With already four debutants notched, the Philippines has emerged as among the region’s REIT IPO hotspots in 2021. China’s highly anticipated REIT pilot programme, which finally came to fruition in June with the listing of the country’s first batch of nine infrastructure REITs, is a milestone for the region, while India’s REIT and InVIT regimes, riding on the country’s immense potential, will likely be in an extended cycle of growth.
Several bourses in the region have or are mandating sustainable reporting, introducing more transparency and compliance to sustainability policies and practices. The Singapore Exchange is seeking feedback on its proposal for listed companies to supply climate-related information and disclosure on board diversity as part of its regulatory compliance. REITs can be at the forefront of the industry’s transformation. With an onus to continually undertake yield accretive investments through acquisitions or asset enhancements to sustain dividend payouts, REITs are incentivised to catalyse these changes.
Rise of sustainability Investing
Sustainable investing is also taking off in the Asia Pacific region, as institutional investors accelerate their adoption of ESG criteria in allocating capital. Many investors are viewing the crisis as a clarion call for a different approach to investing. According to APREA’s ESG Member Survey conducted earlier this year, 93% of respondents believe that proper ESG implementation has a role to play in their business.
The strength of inter-regional institutional capital in the region will be a force for change. Within the area, its growing ranks of HNWIs, who are increasingly demanding socially responsible portfolios, will also be a crucial driver. The race to net zero announced by countries in the region highlights how the policy landscape has turned.
MSCI notes that over the past three years, over 80% of sectors in each market of the region have seen an improvement in their overall ESG scores. China, currently the world’s largest carbon emitter, has committed to turn carbon neutral by 2060. The country has already overtaken Japan to be Asia’s largest green bond issuer and its place as the world’s largest will likely be just a matter of time.
Meanwhile, Singapore and Hong Kong have also recently announced plans to stake claims as the region’s green finance hubs, a crucial cog in the ecosystem to incentivise ESG projects. Initiatives like these across the Asia Pacific countries will drive significant capital towards a lower-carbon economy. The ambitious targets set no doubt presents significant opportunities for investors.
A massive opportunity
While no region is immune to climate change, in many ways, Asia Pacific countries stand out as being more exposed, amplified by their economic dependence on the natural resources and agricultural sectors, as well as densely populated cities and low-lying coastal cities.
McKinsey Global Institute estimates that the region’s GDP at risk accounts for more than two-thirds of the total annual global GDP impact, with US$1.2tn in capital stock expected to face damage by flooding in a given year by 2050. Without adaptation and mitigation, Asian societies and economies will be increasingly vulnerable to climate risk.
With urbanisation still at the halfway mark, the region can take steps to ensure a more resilient future and capture the opportunities from sustainability causes. According to EY’s Renewable Energy Country Attractiveness Index, China and India are ranked among the world’s top three markets in terms of renewable energy investment and deployment opportunities. And precisely because of the region’s ongoing economic expansion, it has a long runway to re-order its priorities and secure a more sustainable future for itself and the world.
The region remains well positioned to address these challenges. APREA, on its part, has continually advocated for the adoption of ESG and Sustainability Best Practices in the real assets industry. Making sustainable investment decisions is increasingly a part of APREA members’ DNA and APREA is committed to bridge that transition towards a net-zero world.
