Is ESG Investing just a hype?

Environment, Social, Governance (ESG) investing has been making headlines in the investment space, particularly amongst younger investors who want to align their dollar votes with their sustainability beliefs.

However, is ESG investing only suitable for that feel-good factor? How does ESG investing perform, and can it give you low or high returns? 

While 80% of Singapore investors believe in the concept of ESG investing, only a quarter have acted, citing the lack of knowledge as the key reason. This article aims to address this by giving you a brief breakdown of what ESG investing is, its trends, and key factors to consider before making an investment.

First and foremost, is ESG really popular?

Seasoned investors can attest to the importance of conducting due diligence and research before investing in any financial products. While ESG investing has been trending worldwide, it has not taken off quite as much here in Singapore.

A survey conducted by Asia Sustainable Investing that interviewed close to 10,000 respondents across the region placed Singapore at the bottom when it comes to ESG investing.

What exactly is ESG investing?

ESG investing goes by many names. Some terms are impact investing, sustainable investing, or socially responsible investing.

Regardless, ESG investing analyses non-financial factors to find growth opportunities for investors. It has three key forms of consideration toward the environment, social/people, and governance.

• Environmental 

How do environmental issues present risks and opportunities to a company? 

The Earth’s rising temperature has impacted long-term profitability in businesses. Firms using natural resources need to adapt to these environmental changes, especially if there are policy interventions that result in direct cost considerations.

For example, firms have to seriously think about their margins by factoring in carbon taxes and subsidies for green energy. Since climate change can also destroy farms’ crops unexpectedly and lead to high material costs, firms cannot afford to ignore climate change.

• Social 

What is a company’s relationship with people and society? 

Companies are concerned with brand image. When they fail to focus on something that consumers and stakeholders care about, they lose credibility and reputation. With people willing to pay a premium for sustainable products, CSR is now a tool to attract and build relationships with customers. 

• Governance 

How is a company’s board protecting shareholder interests?

ESG is also about fairness in representation. The board should be diverse in gender, race, age and more to prevent myopic decision making. Ultimately, the board needs to strategise the best way to maximise shareholder value.

How has ESG investing changed over the years?

In the past, sustainability was considered a niche subject that is not top of mind for most businesses. It is a cost centre for firms, and a luxury that start ups or SMEs cannot afford especially with the lack of quality data to justify changes. 

However, the situation has evolved. Due to cultural changes, bigger players, and a shift in mindset, sustainability is now viewed more as a pre-requisite.

The wind power sector has been driving ESG wins.

• Cultural changes

Consumers now judge and make purchases according to companies “commitment to ethics and sustainability”. This, along with the rise of open conversations addressing climate change, human rights and good governance, has made the interest in ESG investing mainstream. 

• Big players

This cultural shift convinced professionals, governments, and institutions to use ESG metrics to access and measure a company when making strategic decisions. Companies have also been forced to raise their corporate social responsibility efforts by paying attention to matters such as carbon footprint or fair employment.

Companies and industries that have been slow to adapt to ESG practices have received pressure from their stakeholders, employees and customers to step up.

• Shift in mindset

The pandemic has disrupted global markets. The sense of continuous uncertainty pushed investors into thinking about their societal impact, thus creating interest in ESG funds.

ESG investing’s push into the mainstream market can be seen in early 2020, which saw $45.6B USD flow into sustainable investment funds. With $30.7T currently in sustainable investment funds worldwide, this number is expected to rise rapidly to $50T. This outlook has also pushed other funds to start considering taking a blended approach by looking at adding ESG companies into their portfolios.

“Sustainability is no longer about doing less harm. It’s about doing more good.” – Jochen Zeitz, President & CEO of Harley-Davidson

Is ESG investing for you?

At the end of the day, each investor has a different goal. Some prioritise investing in products that tie in with their personal values and goals, while others do not factor that at all. Knowing that you have contributed to a company that serves coffee from ethically sourced coffee beans may be important to some investors but mean nothing to others.

Different investors have different goals.

However, the question is this - Can you support your values while maintaining sound investment principles pursue higher expected returns? If ESG investing only allows investors to feel good, it would unlikely be able to survive.

How does ESG investing perform, and can it give you low or high returns?

The truth is that a positive societal impact and profit can co-exist.

What are some factors to consider to kickstart ESG investing?

Investors can kickstart their ESG investing journey in four key ways, via integration, exclusion, inclusion and/or impact.

• Integration

ESG Integration is the explicit and systematic inclusion of ESG related issues into a personal investment analysis, strategy and choices.

This requires doing an analysis of financial information and ESG information, which allows us to assess the potential impact or risks that come with these implementations. A good example would be how a company might integrate green practices while maintaining profit. 

• Exclusion

ESG Exclusion is the intentional avoidance of companies that work in unethical, unlawful, or harmful industries. This can include sectors such as alcohol, tobacco, gambling, adult entertainment, or weapons.

ESG criteria can be used to determine if a company should be removed from consideration. The UN Global Compact has universal guiding principles.

• Inclusion

ESG Inclusion is the use of a world index to determine if a company is hitting their targets in social responsibility while also having a strong financial performance and growth potential. 

Companies will be judged by their marketing practices, environmental reporting and policymaking and social reporting. A company may have strong policies when it comes to gender balance, inclusion and diversity. 

• Impact

ESG Impact investing means investing in companies that have a positive impact. It refers to investing in companies looking to do good .

An example of this is investing in companies who focus on renewable energy because they believe that it will positively impact the environment. 

Now what?

Find out if ESG Investing is suitable for you.

Now that you have a better understanding of ESG investing, it may be time to dig deeper. Find out how you can  contribute to sustainability efforts without compromising on your investment goals by speaking to one of our financial advisors today.

“The best way to predict the future is to create it.” – Peter Drucker