Asian asset owners facing “imminent” climate threat – report

Climate change-induced water scarcity puts $4.3trn of GDP in the region at risk

Asset owners in Asia face an “imminent threat” due to a unique matrix of climate and water risks, a new report has warned.

Climate change-induced water scarcity puts $4.3trn of GDP in the region at risk, the paper says, spelling trouble for Asian asset owners, whose allocation practices and market indices mean their portfolios are significantly skewed towards their domestic markets.

“They can’t afford to be asleep at the wheel.”

According to the research, Asian assets are singularly vulnerable to climate change.

The world is on track to a 3°C warming scenario with serious, severe impacts on water resources, the report says, referencing the 2018 UNEP Emissions Gap Report.

In Asia, cities are clustered along and, are dependent on, rivers, many of which stand to see flows shrink in the next 50 years, even under a 2°C scenario.

With water resources already limited in the region, policy to ensure water and economic security – what the report terms “water-nomics” – is arising and projected to continue, giving rise to added regulatory risk.

The report, published by Manulife Asset Management, the Asia Investor Group on Climate Change (AIGCC) and China Water Risk, reviewed 30 unnamed large public pension funds, sovereign wealth funds, and central banks from 12 Asian markets, and used company-level analysis from climate data firm Carbon Delta.

Emily Chew, Manulife’s Managing Director, Global Head of ESG Research and Integration, said asset owners in Asia providing long term savings or a backstop for economies are particularly vulnerable. “Their timelines are very much aligned with the timeline for disruption caused by climate change and water scarcity to materialise,” she said. “They can’t afford to be asleep at the wheel.”Asian asset owners are also already underfunded in the context of rapidly ageing populations. In some cases, this can be further compounded by regulatory requirements that prohibit geographic diversification; the ratio of asset owners’ domestic investments to country GDP can be as high as 25-45%

Chew said investors in Asian equities or bonds should also be attentive to the risks.

She said: “India and China are moving – faster that the markets are realising – to limit water use and outsource water footprint to other countries.”

According to the report, Asian asset owners should consider the effect of rising sea levels and storms on ports in the context of Asia’s highly export-oriented economies, and the potential impact on global trade and supply chains.

The report encourages investors to use geo-spatial mapping to take stock of physical and regulatory risks from climate change and water scarcity, and incorporate into the due diligence process.

Non-profit initiative China Water Risk, one of the authors of the report, works with investors to look at portfolios, mapping assets along water basins.

It also recommends asset owners to be engaging with asset managers and portfolio companies on climate issues.

The report reads: “Asset owners can play a critical role […] by engaging companies to ensure they are acting responsibly in the context of a future that will inevitably feel the impacts of climate change.”

Chew said: “[Engagement] is improving, but it’s not moving at the pace of alarm that this research would suggest is warranted”.

The report launched at the RI Asia Japan 2019 conference in Tokyo this month, and was presented at an asset owner roundtable, co-hosted by the three authors and held at the Manulife AM offices in Hong Kong.