ESG Investing Enters Portfolio Mainstream

Sustainable investing — or investing in pursuit of environmental, social and governance (ESG) goals — isn’t a sideshow anymore, with investment banks, investors and companies moving it into the mainstream.

That’s the message from UBS recently, pointing to the results of its survey of 5,300 investors, across 10 countries, who have more than US$1 million of investable assets. That showed 65 percent of wealthy investors believe it’s very important to “create a better planet.”

It also found that 85 percent of investors in Singapore are interested in sustainable investing, breaking down to 97 percent of women and 94 percent of people in the 18-34 age bracket.

“This is interesting and important demographics because from our own work we do know that millennials will see the largest inter-generational transfer of wealth in the coming decade. We also know that women’s wealth will grow faster than men’s wealth in the next decade,” Tan Min Lan, group managing director at UBS in Singapore, said in a presentation of the survey results a week ago. She also noted that some of the strong performance of sustainable investments may simply be logical. “If a company is truly responsible, truly aligned with ESG values, then they ought to be more forward looking and actually better managed,” she said.

As a sign of the interest in sustainable investing within the region, UBS noted that the private-equity fund it launched two weeks previously in conjunction with former U.S. Vice President Al Gore and his management team, for sustainable investments had already raised around US$50 million in Southeast Asia alone, compared with a total capacity of around US$250 million globally.

The interest may also be driven by a host of studies which have found that investing with strong ESG principles often results in higher returns.

UBS noted it tells investors only that they wouldn’t be sacrificing returns, but it did note that its sustainable cross-asset portfolio, which it launched earlier this year, had slightly outperformed its benchmarks despite a downturn in emerging market assets.

That was due in part to the outperformance of World Bank bonds in the portfolio, which yield a bit more than government treasury bonds, while offering the opportunity to help finance sustainable development, UBS said.

But while it explained the comparative potential returns cautiously, UBS was firm in its belief in sustainable investing.

The Opportunity Of Our Time?

“UBS is very strongly convinced that this is one of the biggest investment opportunities of our time,” August Hatecke, head of UBS’s wealth management for Southeast Asia, said at the same event.

“If you listen to some of the leaders in this field, for example, Al Gore, this might be one of the bigger revolutions with the size of the industrial revolution and most probably with the speed of the technological revolution or even faster,” Hatecke added.

Hong Kong Stock Exchange.

Other large investors have also noted that measuring the performance of ESG investing shouldn’t necessarily be against a short-term benchmark for “normal” investing. Hiromichi Mizuno, executive managing director and chief investment officer at Japan’s Government Pension Investment Fund (GPIF), said that rather than looking at short-term investment horizons, ESG is a long-term investment.

“We are trying to reduce the long term contingent risks to promote sustainability in the portfolio,” he said at the Milken Asian Summit earlier this month.

GPIF, the world’s largest pension plan, had around 161.04 trillion yen, or around US$1.43 trillion or S$1.95 trillion, in assets under management as of the end of the fiscal first quarter, according to its website.

Mizuno also noted that GPIF didn’t practice sustainable investing by necessarily excluding investments, or divesting from them, because that doesn’t move the needle much.

Avoiding Inclusion

“If we sell it, somebody else will buy it cheaper, so it makes no difference. If the older sustainability conscious investor sells to somebody else, the control of the company just goes to less-conscious investors. It wouldn’t make any progress on that,” he said. He added that sustainable investing often involves asking companies to make difficult transitions and it’s better to work with them, offering enough of a capital commitment to support them through those changes.

However, he noted that GPIF’s efforts were also aimed at reducing risks, and focusing on its investment themes.

“If the company has a lot of environmental impact, we should doubt whether that business model is going to be sustainable. And if the company has no gender diversity on the board, we should question whether they can make a resilient decision in this changing world,” Mizuno said. “So far we have been avoiding that kind of public intervention by focusing on our efforts on minimizing risks associated with the sustainability.”

Other investors pointed to using ESG principles as a way to keep away from the risks of public relations disasters.

Saving Face

Curt Custard, chief investment officer at Newton Investment Management, while speaking at the Milken Asia Summit, pointed to an example of a high-yield debt security that was under consideration as an investment. But with the proceeds earmarked to fund a building and port complex on environmentally and socially sensitive land, Newton Investment avoided the securities because management wouldn’t listen to its concerns, Custard said.

He added that subsequently, the project faced “massive” protests and blockades, which caused the bonds to drop. Newton Investment Management is a London-based, global investment management subsidiary of BNY Mellon and it had around 50.8 billion British pounds, or US$66.64 billion or S$90.95 billion, under management as of June 30, according to its website.

Companies also have pointed to the business case for pursuing ESG principles.

Mark Watson, head of sustainable development at John Swire & Sons (HK), the holding company for an array of businesses including Cathay Pacific Airways, and shipping, beverage and property businesses, said his company has already been seeking to lower the risks of climate change.

Future-Proofing

“We were already impacted adversely. We have a large property development in downtown Miami and that was hit during Hurricane Irma; we were under water,” Watson said at the Milken Asia Summit. “We’ve already seen the impacts, the negatives of climate risks and the need to be future-proofed and resilient.”

Watson noted that aiming to lower the company’s environmental impact and “de-risk” its businesses has let to some creativity.

“How does one decarbonize an airline? How do you divest and move away from fossil fuels,” he asked rhetorically. “The answer is you can be one of the first airlines globally to put your own money and equity stake into a bio-fuel business that’s going to take waste out of the waste stream, gasify that in a closed loop system and then fly your Boeing 747s from North America on biofuel from 2021.”

Some investment banks have pointed to relatively easily understood investments to take advantage of a changing regulatory environment. In a note dated Friday, Nomura pointed to pending legal restrictions to combat the problem of micro-plastics in the oceans, in part through limiting the use of single-use plastics, such as plates, bowls and cutlery.

Nomura forecast that would push the biodegradable plastics market to grow to 1.09 million tonnes in 2022, from just 880,000 tonnes in 2017.

Photo Credit: Shutterstock