Asia's pension funds are set to expand rapidly and can become global leaders in the use of environmental, social and corporate governance (ESG) guidelines, says a new study commissioned by the Asian Development Bank (ADB).

The report, titled The Time to Lead is Now: The Adoption of ESG Analysis by Asian Government Pension Funds and written by the Hong Kong-based Association for Sustainable and Responsible Investment in Asia (ASrIA), provides an overview of the use of ESG guidelines by the region's pension funds and outlines a roadmap to facilitate the adoption of the guidelines by all investment managers around the region.

Pension funds in Asia are set to post unprecedented growth in coming years as they seek to meet the retirement income needs of rapidly growing and ageing populations. It is estimated that the number of people in the region aged 65 years and over will more than double between 1995 and 2050, putting huge pressure on governments and funds to provide adequate income for their elderly.

Development of successful pension funds in the region is also key to long-term economic growth in Asia. "A rebalancing of the global economy depends on Asians consuming more than they do currently. That will only occur if they are confident that pensions will provide for them in their old age. Pensions that generate sustainable long-term returns will help cover these needs and will promote increased consumption," said Philip Erquiaga, Director General of ADB's Private Sector Operations Department.

Responsible investing involves active engagement by investors with companies to encourage the adoption of higher environmental, social and governance standards.

A number of Asian pension funds have already adopted ESG guidelines, but most are lagging. Nevertheless, since most Asian pension fund assets are invested largely in domestic government or corporate bonds, they can incorporate ESG strategies into their equity
investment processes more easily than their global peers. That should allow them to leapfrog and lead the way in fostering the use of ESG best practices, the study says.

"Asian pension funds will increasingly be able to spur the use of ESG best practices through their investment policies and via tenders," said Wai-Shin Chan, Executive Director of ASrIA. "They should also actively use their voting rights at shareholder meetings to ensure investee companies behave responsibly."

By prioritizing sustainable and long-term investment, pension funds can also influence strategic decision making, a significant issue in Asia which is in urgent need of hefty infrastructure investment to support medium- and long-term economic growth. ADB estimates that the region needs to spend $3 trillion over the next decade on infrastructure.