Beyond the pursuit of higher returns, a three-letter term is gaining momentum in the financial world: ESG.
Last year, global flows into funds investing in environmental, social and corporate governance (ESG) principles more than doubled from 2019, surging past US$150 billion (S$207 billion) in the fourth quarter, based on data from investment research company Morningstar.
Schroders portfolio manager Katherine Davidson says: “The Covid-19 crisis has increased the visibility and importance of sustainable business practices. Amid terrifying headlines and unprecedented disruption to our day-to-day lives, investors are rethinking their personal values and priorities.”
The latest Schroders Global Investor Study — an annual survey that polled more than 23,000 people from 32 locations around the world, including China, India and the United States — found that 77 per cent of retail investors refuse to compromise on their personal beliefs when investing.
Despite the buzz, there remains some confusion over ESG investing.
In a survey of 1,100 Singapore residents, digital wealth advisor Endowus found that ESG investing overwhelmingly resonates with respondents. Yet, only 28 per cent of respondents hold any ESG funds. Some 58 per cent of those polled cited a lack of understanding or knowledge of ESG investing.
A key problem is the way in which ESG companies are rated. The lack of a common methodology, data gaps and varying metrics of ESG rating agencies make it difficult for investors to measure whether a fund that labels itself sustainable is genuine or suitable.
A 2019 study by 2 Degrees Investing Initiative, a global think tank for developing climate and long-term risk metrics, found that up to 85 per cent of green-themed funds globally were guilty of misleading marketing.
How, then, might investors assess how robust an ESG portfolio is? What are the opportunities and threats to look out for?
Endowus chief investment officer Samuel Rhee says that investors should turn to recognised ESG standards to avoid companies and funds that exaggerate their ESG efforts.
“There are reliable and reputable third-party rating agencies and regulations such as the Sustainable Finance Disclosure Regulation (SFDR) that investors can use to identify truly ESG-inclined funds.”
The SFDR, developed by the European Commission, identifies ESG products based on a stringent and standardised set of metrics. Such regulations enable advisors and asset managers to better assess the ESG credentials of funds.
Some see this as a turning point for the sustainable investing space.
Mr Jens Peers, chief executive and chief investment officer of Mirova US, the responsible investing subsidiary of Natixis Investment Managers, says: “ESG investment processes are a lot more sophisticated than a few decades ago.”
He adds that with more ESG data available, companies are adjusting their way of working to answer the demands of customers.
“This has led to an increase of well-managed ESG portfolios. Data has shown that there is no performance trade-off and, in many cases, better performance can be achieved by integrating ESG principles into the investment process.”
Money can grow on trees
Want to make a lasting impact? Read more about ESG investing in our infographic.
Stocks with a robust ESG profile outperformed^ the broader market.
^The numbers reflected compare the percentage difference in the 3-year cumulative returns of the MSCI All Country World Index ESG Universal Index and MSCI All Country World Index (ACWI) as at 31 March 2021. The MSCI ACWI reflects the performance of full opportunity set of large and mid-capitalisation stocks across 23 developed and 27 emerging markets. The MSCI ACWI ESG Universal Index reflects the performance of large and mid-capitalisation stocks from the MSCI ACWI that have a robust ESG profile.
How $1,000 can make a difference
Companies that align their operations with the health of the planet and society help to forge a more sustainable future. Find out how much carbon emissions you could avoid annually by investing $1,000 in an Endowus ESG Portfolio.
Carbon emissions avoided* annually is equivalent to:
*Based on latest information provided by the fund managers of Endowus ESG Portfolio (40:60 Equity:Bond Mix) as at Jan 20, 2021. Relevant conversion estimates are based on various sources, including but not limited to EPA or the Energy Market Authority.
Beyond green growth
ESG criteria help investors find companies with values that match their own. Here’s what they take into account...
By the numbers
Sources: Brown Brothers Harriman, Endowus, Morgan Stanley Bank, Morningstar, Principles for Responsible Investment
Click here to learn more about ESG investing with Endowus.
Brought to you by Endowus, Natixis Investment Managers and Schroders