Asia’s wealthiest are increasingly interested in Environmental, Social and Governance (ESG) investments through the course of the pandemic. Edris Boey, Head of ESG Research at Maitri Asset Management and one of Prestige Singapore’s 40 Under 40 2021 laureates, gives us a crash course on getting started.
For many, having experienced the threat and disruption caused by the current crisis, ESG investing offers a sustainable way to build and safeguard fortunes while shaping a positive future for multiple generations to come.
Barely two years ago, the conversations about ESG investing were primarily on what ESG investing is and why we need it. Today, the top question is: “How do we get started on it”. The data speaks for itself: Net inflows into ESG ETFs remained relatively constant at US$4 billion annually in 2015 and 2016. By 2019, inflows have increased 25 times and currently stands at more than US$100 billion annually and continues on an upward trajectory.
However, an indication that the carriage has gone before the horse is the significant concern investors have over “greenwashing”, which is when companies or investment products are presented to look more “green” than they really are. In Asia, where ESG investing is at a relatively early stage compared to Europe or the US, it is integral for investors to be equipped with the confidence to sort the wheat from the chaff. A good place to start is by understanding what is ESG investing.
WHAT’S IN A NAME?
While there is no standard definition of the term ESG investing, it is commonly taken to mean investing with ESG considerations as it is a responsible thing to do. The United Nations-supported Principles for Responsible Investment (UNPRI), one of the most recognised responsible investing initiatives among global investors, offers useful guidance on what might constitute ESG considerations.
According to UNPRI, one should consider ESG issues when building a portfolio by systematically integrating ESG issues in investment analysis; incorporate positive and/or negative screening mechanisms on sectors or companies based on values or ethics; and contribute to specific environmental or social outcomes by simply investing in relevant companies or sectors.
Investors that aim to take an even more proactive role can further encourage companies to improve their ESG performance through engaging them directly or collectively with other investors; and casting votes on or proposing shareholder resolutions on ESG related issues.
Investors in the fledgling stages of their ESG investing journey may be startled by the diverging, and often confusing, jargons on similar-sounding concepts as they are used differently by a myriad of people. Frequently used terminology include responsible-, sustainable-, thematic-, impact- and impact-first investing. Since there are no standard definitions for these terminologies, users can define them in any way they deemed fit; often it is a combination or one of the concepts described.
FROM “WHAT” TO “HOW”
It is meaningful to now shift our focus to the “how to” of ESG investing. There are generally two ways to go about it – one is to invest in an ESG-labelled product, and the other is to develop and apply your own ESG criteria to any investment opportunity that comes your way.
When looking at ESG-labelled products, the starting point would be to understand the ESG elements incorporated into the product. These elements should typically include a combination or one of the aforementioned concepts described above, and could usually be found in the product’s offering document or factsheet.
An example of an ESG-labelled product would be a green bond, which differs from a traditional bond as green bonds’ use of proceeds are limited to projects contributing towards environmental objectives. To further allay greenwashing concerns, one can seek to ascertain whether there are dedicated ESG specialists involved in managing the ESG elements of the product, as well as the credibility of the ESG data sources used in the process. In short, it is important to look beyond the ESG label to determine whether a product has sufficient ESG elements.
ESG investing is not limited to ESG-labelled products. In fact, an investor could invest in assets that one has an affinity for or those that fulfil a family’s vision or long-term aspiration, by developing one’s own ESG benchmark across the investment portfolio.
Factors to be considered can include the following: Is there a specific environmental and/or social theme that you or your family have interest in or want to avoid (negative and/or positive screening of specific sectors or industries, or thematic investments, such as a focus on healthcare, or climate change)? Do you prefer that your investments prioritise creating positive impact on the society and/or the environment with less than competitive financial returns (impact-first investments)? Will you be systematically applying the same set of ESG filters on every single investment before adding them to your portfolio (the extent of ESG integration)? Will you want to play an active role in engaging companies you invest in to improve their sustainability performance, and voting on shareholder resolutions (stewardship)?
The bottom line is that there isn’t a one-size-fits-all solution to ESG investing, as everyone can have different levels of ESG thresholds and priorities. The approach to address and evaluate ESG issues also differs slightly between different asset classes such as bonds, public equities and private assets. The important thing is to proactively take the first step towards learning more about ESG investing, instead of avoiding the journey due to a lack of know-how. ESG investing is on the way to becoming mainstream, potentially paving the way for a future in which investments that do not consider ESG issues will, eventually, become the minority.
This article first appeared in the October 2021 issue of Prestige Thailand.