Feb 17, 2021
- Historically, 90% of global responsible finance assets were located in developed economies in Europe and North America
- Recent surveys find significant growth in in the Middle East and Asia of awareness by asset owners of the financial performance benefits of responsible finance
- RFI is helping to support this growth of responsible finance in Islamic markets, including with a new report launch this week
The momentum of responsible finance is well established in developed economies in Europe and North America, where 90% of the global market was concentrated in 2018, according to the Global Sustainable Investment Alliance’s last biennial review, but since then there has been a sea change in the global trajectory.
Europe has pressed ahead on its ambitions for sure, and the United States has changed direction as well under a new president, but the most surprising change may be what is happening in Asia, where financial institutions and investors are fast changing perceptions on how ESG affects investment performance.
For example, in a recent survey, Bfinance found that more than a third of investors across the Asia-Pacific region (including the Middle East) expected that ESG integration would lead to outperformance in equities over the next three years. One-quarter said the same thing for real assets and private equity.
Although this is not yet a majority view, it is unlikely to retreat, especially in emerging markets where international investors had already been integrating ESG into their strategies. One issue in particular — climate change — is likely to see the most rapid growth in investor focus across Asia and the Middle East.
In a recent survey, MSCI found that 31% of the largest institutional investors say climate change will have the biggest impact on the way their organization invests in the next three to five years. Where climate change differs from other ESG issues is that it is much more widespread and systemic. It goes beyond a single factory being exposed to the risk of flooding because of its siting, or the community impacts of its effluent.
Climate change leads to greater risk of acute crises such as flooding or drought, but it also affects the underlying economic fundamentals and natural capital that underpins economies’ resilience. It will affect investors and financial institutions, and as MSCI found, the issue went mainstream in 2020.
For financial institutions that are not taking account of their climate-related risks, they are falling behind their peers and investors. Among major asset owners, Bfinance found that 57% were already using carbon reporting and measurement, while another 20% were considering using it. One of the key gaps facing the core markets where Islamic financial institutions operate is that there is much less data about the climate-related exposures.
The RFI Foundation has an ongoing project working from the top down to identify where the risks are most concentrated. We released a report focused on Malaysia’s financial system in November, and will be releasing a similar report during a webinar organized together with the Indonesian Banking Development Institute (LPPI) on Thursday this week.
As responsible finance shifts to the Middle East and Asia, these types of new data will be critical to help investors and financial institutions find their way through new and growing risks. It is a challenge the RFI Foundation is ready to tackle with our members and partners.
Want to learn more about how RFI Foundation can help you identify your biggest opportunities in responsible finance? Contact us for more information through our Membership Page or by email at info@rfi-foundation.org.
Republished from the RFI Foundation’s weekly newsletter. Subscribe for free here!
