Sustainable investing, or ESG investing, is an important and positive trend that will lead to a better future for humanity.
Just a few years ago, it wouldn’t have occurred to us to think about how our investment decisions could shape the world. For far too long, a company’s net negative impact on the world didn’t matter as it was focused solely on maximising profits.
But as we increasingly witness how unsustainable corporate actions can have adverse and long-term effects on the environment and society, investors today are challenging the status quo and asking a vital question:
How do we stay sustainable while investing?
This question has spurred more and more investors to put their money towards sustainable investments—companies that are staying accountable and addressing their impact on the world and the future of our society. In fact, the Forum for Sustainable and Responsible Investment reported that the total AUM for US-domiciled sustainable investments grew by 42% (from US$12 trillion to US$17.1 trillion) between 2018 and 2020 alone.
But what exactly is sustainable or ESG investing? And why should ESG investing matter to you? We’ll get into that here.
What is ESG investing?
The most immediate thought that comes to mind when you think about sustainability is environmental protection. While environmental issues get the most media attention, ESG investors also look at two other components when assessing sustainability: social and governance. These three components make up the ESG acronym.
In addition to using traditional investment methodologies, ESG investors often factor ESG issues in their evaluation of a particular investment and their construction of the portfolio. Here’s a breakdown of each component:
Though these three components are distinct in their own right, they often overlap in their outcome. For instance, a company that’s transparent and has good corporate governance (G) will likely also work to ensure that it stays accountable to the public (S) and the public’s health by minimising its environmental impact (E).
The end result? An ESG company will more likely have a net positive impact on the world.
Why ESG investing should matter to Singaporeans
For Singaporean investors, ESG considerations should matter even more. Beyond just thinking about your retirement, as long-term investors, you would also think about what the world would look like when you hit retirement 30, 40, or even 50 years down the line.
Possibly the most pressing concern is the impact of climate change on Singapore. Data from the Centre for Climate Research Singapore (CCRS) indicate that Singapore could see average daily temperatures rise by 1.4℃ to 4.6℃, more intense and frequent rainfall, and average sea levels rise up to 1 meter in about 80 years.
Between now and 80 years later, increased temperatures can cause a whole host of issues for Singaporeans; we would increasingly need to use more energy to cool the city, the country’s biodiversity could be affected, and diseases such as dengue could be harder to manage. Not to mention, the rising sea levels pose an imminent threat in the low-lying areas of the country.
Though we may not feel it now, these problems will cost us more—both as a nation and individually—in the long run, if they aren’t managed properly now.
Singapore’s investment in a sustainable future
Thankfully Singapore, as a nation, is placing a strong emphasis on sustainability. In 2021, the government unveiled the Singapore Green Plan 2030. The plan commits to the Paris Agreement and the United Nations 2030 Sustainable Development Agenda with the goal to achieve long-term net-zero carbon emissions.
As part of the plan, the government plans to issue green bonds on public sector green projects, with around S$19 billion of projects already identified. One thing is clear: Singapore aims to be the regional centre for sustainable finance, and this can be a catalyst to enable more sustainable development in the country and beyond.
Besides issuing green bonds, the government will also directly invest in environmental initiatives—setting aside S$60 million for locally-produced food, S$50 million for community-led environmental projects, and S$30 million for EV-related initiatives, planting 1 million more trees, greening 80% of Singapore buildings, and expanding the rail network.
All these initiatives point to the fact that Singapore is taking sustainability seriously, and investors have plenty of opportunities to be at the forefront of this incredible change.
Influencing change through ESG investing
Despite Singapore's attempts to mitigate environmental risks, companies and governments in other countries may not be taking similar steps to slow climate change. For instance, if other countries increase their carbon emissions while we’re reducing our own emissions, our effort is cancelled out. In other words, climate change really does require a global effort.
The global pandemic also shone a light on some glaring ESG issues globally. Public health and sanitation (E), employee well-being, income inequality and diversity (S), and corporate regulation (G) were some of the big talking points of the year.
So, what can you do as an investor?
That’s where ESG investing comes in. Your capital and where you decide to invest it can influence companies’ decisions.
If you choose to avoid companies that undermine ESG efforts (this is known as negative screening) and if you then choose to invest in companies that are integrating ESG into their decision-making and business practices (known as positive screening), you’re basically telling companies and investment funds that you want them to be accountable to their actions.
The more investors demand accountability, the more likely we’re able to impact ESG changes in corporations. This means we can influence companies to reduce their carbon emissions, enhance their labour protection and employees’ rights, or ensure that their board members act in the best interest of their stakeholders.
Many fund managers are starting to enable investors to drive change. ESG funds, in particular, go out of their way to ensure their investments meet their high sustainability standards.
For instance, leading funds like Schroder ISF Global Sustainable Growth Fund and Mirova Global Sustainable Equity Fund employ disciplined investment processes through holistic ESG analysis. The funds assess companies based on their long-term impact on all stakeholders including employees, the environment, suppliers, customers, regulators, and so on. Using proprietary ESG metrics, the funds evaluate companies on key sustainability-related issues, and only companies that pass the rigorous ESG assessment are considered for investment.
How ESG can improve your portfolio’s performance
One upside to the growing trend towards ESG is that now you don’t have to choose between sustainability and potential returns. Many funds factor ESG as a risk management enhancement to address the evolving global systemic risks. In other words, having ESG investments can help reduce your risk while also giving you the opportunity to earn a better return.
Think about it: Companies that fail to recognise the ESG challenges we face today can impede their own growth. And companies that make the effort to be more sustainable are future-proofing themselves, and are ultimately better positioned for growth.
As evidenced by the S&P 500 ESG Index outperforming the S&P 500 Index in 2020 during the pandemic, companies with a reliable ESG track record were more resilient than their non-ESG counterparts. At the time of writing, the S&P 500 ESG Index has outperformed the S&P 500 Index by 0.67% on a 1-year total return basis and 1.22% on a 3-year total return basis.
Get started on your ESG investing journey
With Endowus, ESG investing is made even more accessible. You can build a diversified ESG-focused portfolio with our ESG offerings that aligns your investment decisions with your personal values. Remember: sustainable investing is about future-proofing your investments and influencing change towards sustainability while enhancing performance. Learn more about our ESG offering here.
Get a head start on financial literacy & general investing by watching our Investing 101 with Endowus 4-part series here.