Continuous investment - this is it

What does it mean and why is it important?

Social responsibility, goals, environment, social, governance, or what is abbreviated as ESG (Environmental, Social, and Governance) in English, are no longer just words. In fact, these factors are starting to top the priority agenda of companies, governments, and individuals - including investors

Sustainable investing means using sustainable factors, such as ESG, along with financial factors, to value companies and assets. Additionally, sustainable investing is also an umbrella term that is often used interchangeably with ESG investing, socially responsible investing, ethical investing, and several other forms of investing, such as impact investing. While there is no standard definition for each factor, the “E”, “S” and “G” (or “L”, “S” and “T”) components generally include the following:

 

Why is investing important and why now?

In recent years, sustainable investing has gradually made its way into mainstream consciousness. In addition, we also believe that awareness will continue to exist, and for good reason.

Today, the sustainability aspect is no longer just a list/order in a company's annual report, but is also the foundation for a modern business structure. As investors, it is important to choose how and where we will invest. In fact, these considerations are not only important to us as investors, but also to society at large.

Companies with strong goals and building sustainability into their DNA tend to perform well. For example, research conducted by MSCI (an index provider) in 2017 found that companies with higher environmental, social and governance (ESG) scores have higher profitability and lower tail risk1. In addition, another finding from the University of Cambridge in 2019 stated that Chinese small and medium technology companies with gender-balanced team management proved to be better in difficult times by recording an increase in profitability of 19.5% and an increase in returns. assets of 24.8%2 .

Investing sustainably does not mean having to sacrifice profits. Conversely, research shows that stronger practices tend to outperform other companies or the wider market. This is also evidenced by the fact that over the past five years, ESG Leaders in Asia's Emerging Markets (EM) Index have outperformed the broader index by 266 basis points.

 

Other visible research:

• Research conducted by Bank of America Merrill Lynch (BoAML) in 2019 on United States stocks found that every year, from 2014 to 2019 to be precise, stocks with strong ESG scores outperformed the broader S&P 500 Index by up to 3 proportion points4 .

• In 2015, a study conducted by asset managers Robeco and the Hong Kong University of Science and Technology (HKUST) School of Business on public companies in Asia, Europe, and North America concluded that Asian equity investors may enjoy higher returns as well as portfolio risk lower when they consider ESG factors, particularly corporate governance5.

Proven aspects prove to be an effective risk management tool for companies and investors. From an investment standpoint, a sustainable asset or portfolio represents lower risk. For example, the Asian Emerging Markets (EM) ESG Leaders MSCI Index exhibits a lower standard deviation (a measure of risk), while providing a higher average return compared to the broader index.

It is undeniable that the integral role played by sustainable factors, especially in terms of decision making, philosophy, and investment processes continues to increase. The interest has been clear: in the United States, sustainable investment managed funds in 2019 have soared to new highs, and this was actually driven by record net inflows increasing almost fourfold over the previous year6 .

The growth of sustainable investment managed funds is expected to continue. Institutional investors, including large asset owners and asset managers are now taking the lead, as evidenced by the growing number of signatories to the United Nations Principles for Responsible Investment, or UNPRI. UNPRI itself contains six voluntary principles, which are aimed at incorporating ESG into investment practices. In addition, some companies also use UNPRI as a screening criterion to evaluate asset managers.

Some institutions that are serious about investing in a sustainable manner are the Government of Japan Pension Investment Fund (GPIF), which is also known as the world's largest pension fund, the California Public Employee Retirement System (CalPERS)7 and Norway's Norges Bank Investment Management8 .

It is strongly believed that the increasing demand for sustainable investments will also increase valuations, which in turn will benefit investors. As an investor, you can take advantage of this wave by considering sustainable funds and companies, or integrate ESG holistically into your portfolio.