Dr Samuel Barbosa Da Cunha, CEO & Chairman at Bar Trading Japan on sustainable investment and how it should be the focus of Asian economies moving past the pandemic.
COVID-19 is hitting economies hard. Economic projections from the start of the year have all been revised and strategies are changing all the time. But it’s clear for affluent economies in Asia and in the West, now is the time to build foundations for a sustained recovery.
And according to the International Monetary Fund (IMF), this recovery starts with increased spending as long as the spending is for public investments that aid recovery. This includes sustainable investing in areas like clean energy and digital infrastructure.
Sustainable investment is a relatively untapped sector in Asia
The IMF says that more public investment will lead to sustained economic growth. The result of this could be a decline in the debt to GDP ratio, leaving Governments unburdened by the recent accumulation of massive debt. In my opinion, this is based on a number of assumptions. Specifically, that Governments are using financial borrowing in the best way for the majority, rather than to subsidise businesses.
However, one thing we can all rely on right now – the economic crisis caused by COVID-19 is here and it’s not getting better any time soon. So, for previously strong Asian economies, it’s time to do whatever it takes. Developing economies are facing even bigger challenges, of course. However, Governments everywhere must support the economy during and throughout this prolonged time of crisis.
Investor demand has strengthened for China issued debt during the pandemic. Investors are undoubtedly attracted to the relatively high yield. This combined with the strength of China’s economy and the country’s apparent success in stopping the virus getting out of control, means China is on course for recovery.
With experts agreeing that sustainable investment as well as digitisation is at the heart of any future economic success, let’s look at how Asia fares in this sector.
How will Asian economies recover post pandemic?
COVID-19 has slowed down the rise of prosperity that was happening before the pandemic in Asian economies. We can expect to see economic activity contract in most Asian countries. Comparisons with the 2008 global financial crisis point towards this being more difficult to overcome. Before we consider sustainable development in Asia, here’s a quick projection from the IMF on Asia’s economic outlook.
In 2009, at the time of the last global downturn, the global economy contracted by 0.1%. According to the IMF, the contraction this year will be more like 4.9%. Developing economies in Asia are projected to contract by 0.8%, compared with the annual average growth of 7% between 2010 and 2020.
China’s growth will slow down, and advanced Asian economies like South Korea and Japan are expecting also to contract. However, growth is expected to pick up in 2021. The recoveries of Asian economies won’t be fast and it’s unlikely that any country’s economy will recover completely until a vaccine is administered to the world’s population.
ESG targets will become more mainstream for investors
Under these circumstances, Governments are limited in some ways. The decision of whether to continue to support short-term economic activity is difficult and is being weighed up against the spectre of mass unemployment and declining industry.
Pre-pandemic Asia was the growing sector of the world’s economy. It’s likely that it still will be, but it has always lagged behind the West in socially sustainable investment. Economic development has been the watchword for decades in Asian economies with scant regard for social and environmental consequences.
This has resulted in heavy pollution problems, increases in inequality and other negative consequences. However, it did boost living standards for billions of people. The pandemic is the catalyst for a change in focus for Asian economies. Investors, Governments, regulators, businesses and consumers must all work together to achieve this.
Asian economies have huge potential to increase their share of the world’s economic output. And because of this potential, there is scope for Environmental, Social and Governance (ESG) targets to be focused on more and more. To recover economically will mean targeted investment in different areas, and it’s possible that within ten years Asia could lead in sustainable investment.
Switch from short-term economic growth to long term sustainable investment
As developing regions in Asia become increasingly urbanised, there must be a significant amount o investment in infrastructure. This ranges from waste management to transport, power and digitisation. While awareness of the importance and future power of sustainable investment in Asia has been slow to grow, I think that COVID-19 will push it further up the agenda.
Asian investors will move away from the more traditional view of short-term investment and ahead to a post-pandemic world that must be prepared for any scenario or challenge. And it is the business community that must move forward and embrace these principles throughout Asian economies. It’s understandable that businesses have been heavily focused on rapid economic development over the past couple of decades. This was the overarching goal. But we can’t ignore that principles of ESG and as we continue to live in a world that has been thrown off-balance in a major way, the urgent need to do so becomes clearer.
Businesses and Family Office investors should select opportunities based on the ESG impact. As we move through the pandemic and wait for a vaccine, we must collectively future proof the economy now. Sustainability must be placed at the core of regional development. This was already becoming clear before COVID-19 and there are examples of attitudes changing.
For example, here in Japan MUFG (one of the biggest banks in the world, announced last year that it was ditching its policy on investment in coal-based power projects. More must be done to realise the full potential of sustainable development throughout Asia. For this work, we also need to bridge the gap between Asia’s potential in this sector to reality with new platforms. Digitisation, Fintech and innovation are transforming just about every industry sector around the world. And this will ramp up as we head towards economic recovery in 2021.
Asia, and in particular Japan, already play a major role in the global Fintech industry. I expect to see more and more start-ups, innovative tech ideas and solutions to transform the Asian economy. As Asia emerges as a world leader in other fields, I believe it will continue to do so within sustainable investing. And while COVID-19 is obviously a big challenge in all ways, perhaps it will provide the catalyst needed to spur this sector on.
