Sustainability Matters

Agenda of sustainable development is fast proliferating in our society

The sustainable agenda is fast proliferating in our society with the COVID-19 pandemic serving only to heighten awareness on Environmental, Social and Governance (ESG) issues on multiple fronts, i.e. Consumers, Governments and Businesses. Consumers are today demanding for more sustainable products, from plant-based foods to recycled fashion. Governments have also responded with U.S. President-elect Joe Biden’s commitment to rejoin the Paris Climate Accord and China leader Xi Jinping’s pledge to reach carbon neutrality by 2060 illustrating the increased focus on the sustainability agenda.

Investing with a sustainable focus could help enhance portfolio returns

Meanwhile, there is increasing evidence that corporates with a sustainable focus can benefit from better profitability and risk control, thus helping to lift valuations. In fact, the performance of the MSCI World Socially Responsible Investment (SRI) Index, which provides exposure to companies with outstanding ESG ratings, has outperformed the global equity markets over the past five years.

In view of the above, there has been a rising demand for sustainable investments that has also led to an expanded pool of related products. Notably, the total assets in ESG exchange-traded funds/products have exceeded USD 100 billion as at end-July 2020, according to ETFGI, a leading independent research and consultancy firm. More green bonds have also been issued. Notably, the National University of Singapore became the first university in Asia to issue a green bond by raising SGD 300 million in May 2020.

Adopting a diversified approach is important as the market evolves

Sustainable investing is available across multiple asset classes including listed stocks, private equity, infrastructure and real estate projects, as well as fixed income investments. In addition, there is no one-size-fits-all approach when it comes to sustainable investing. Investors have to consider their investment objectives, preferences and risk tolerance. For instance, sustainable private equity investments, which tend to be less liquid, may be only suitable for those with a longer-term investment horizon.

As sustainable investments can still be volatile and are not without risks, diversification remains important. Hence, instead of buying a single stock or a green bond, it would be better to build a portfolio of sustainable investments across asset classes, sectors and regions.

Without a doubt, there remain challenges to sustainable investing. Many companies may not provide full transparency on their ESG performance. Some may even engage in “greenwashing” practices i.e. providing misleading information about the impact of their activities on the environment.

In addition, the methodologies employed by different ESG rating frameworks may not be consistent and could lead to drastically different outcomes when used to construct a portfolio. More standards and regulations will likely be put in place as the market continues to evolve. In the meantime, it may be worthwhile to engage investment professionals with the relevant expertise and track record to decipher and select appropriate sustainable investments, which could potentially help to enhance portfolio returns.

MSCI World SRI versus MSCI All-Country World Index*

*Indices rebased to 100 as at end-November 2015

Source: Bloomberg I November 2020

Total assets in ESG ETF/ETP have exceeded USD 100 billion**

**ETF/ETP = Exchange Traded Funds/Exchanged Traded Products

Source: ETFGI I August 2020

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