The looming climate crisis and Covid-19 pandemic are fuelling a shift among investors in favour of more socially and environmentally responsible investment products.
And fund managers have taken notice, going by key findings from a recent survey of 58 professional fund managers by the Investment Management Association of Singapore (Imas).
Imas represents over 120 members, comprising mostly chief investment officers and chief executives of global fund management corporations in Singapore.
In the poll, 86 per cent of fund managers identified environmental, social and corporate governance (ESG) investing as a key growth driver in 2020, up from 68 per cent in the previous year. Sixty-seven per cent of respondents ranked ESG and impact-focused strategies as top strategies that will continue to grow in popularity this year.
Despite the clear merits of ESG investing, some retail investors remain unsure. A survey of over 1,000 Singapore residents by digital wealth advisor Endowus in March found that more than half lacked understanding or knowledge of the topic.
To help investors, we sat down with Endowus chief investment officer Samuel Rhee, and Ms Olivia Albrecht, head of ESG business strategy at Pacific Investment Management Company (Pimco), to answer readers’ questions on ESG investing.
Why should investors consider ESG investing?
Mr Rhee: ESG investing marries doing good with doing well. It takes into account a range of sustainability factors, in addition to standard financial measures, when evaluating an investment product or building a portfolio. These factors include a firm’s impact on the environment and society, as well as its corporate governance standards.
This investing approach helps to bring about change by keeping companies accountable and incentivising them to make progress on sustainability issues such as reducing their carbon footprint, enhancing stakeholder rights and improving employee welfare. By investing in a company that scores highly on ESG criteria, you are investing in a cleaner, healthier and more sustainable world.
That said, while sustainability is a key focus of ESG investing, investors should keep in mind that performance remains a primary objective for fund managers. It’s a win-win for investors; they don’t have to choose between sustainability and potential returns at the expense of either.
What are some factors that investors should keep in mind when investing in ESG?
Ms Albrecht: ESG factors are increasingly essential inputs when evaluating global economies, markets, industries and business models. These factors can include a multitude of topics and issues depending on the sectors, industries and asset classes.
For example, material ESG factors such as climate change risks, social inequality, shifting consumer preferences, regulatory risks and talent management are important considerations when evaluating long-term investment opportunities and risks.
We believe incorporating relevant ESG factors should be part of a robust investment process.
There is a lack of standardised ESG criteria to benchmark companies and funds that heed ESG principles. How, then, can investors determine the authenticity of an ESG-linked fund or company?
Mr Rhee: This is currently the biggest challenge faced by retail investors when it comes to ESG investing. Many of them think they don’t have sufficient knowledge of ESG factors and may lack the confidence to choose the most suitable investment options.
A reputable, low-cost advisor can help simplify the process and provide a stringent due diligence process to help identify the best funds available, then work with the managers of those funds to achieve the lowest cost possible for their clients. This type of approach is particularly useful for ESG investing due to the additional complexity that individual investors may otherwise face.
At Endowus, for example, we developed multi-asset, multi-manager ESG portfolios that are globally diversified across geographies and sectors.
How we do it: First, we review the entire ESG fund universe. Then, we select best-in-class equities and fixed income products from top fund managers like Pimco that are at the forefront of sustainable investing. Selecting funds that have a long track record of delivering good risk adjusted returns is important. However, it is more important to ensure that the fund managers employ disciplined investment processes through holistic ESG analysis to assess the long-term impact a company has on all stakeholders before choosing what to invest in.
And, similar to our traditional investment solutions, we select funds for each portfolio based on a systematic portfolio optimisation process that strives to maximise expected returns for each investor based on their risk appetite.
What is the difference between fixed income products and equities in ESG investing?
Ms Albrecht: Historically, ESG investing has been dominated by equities, or company-issued shares that provide partial ownership to investors.
However, the global fixed income market is substantially larger than the equity market. Fixed income securities, or bonds, are debt obligations that are a critical way for companies to raise capital.
Compared to equities that are issued in perpetuity, most bonds have a maturity date and companies may need to refinance them down the road. This offers a wide range of opportunities for the ESG fixed income investor.
We believe bondholders have a powerful voice to drive change in companies, countries, states and local governments, as well as other issuer types.
They can drive positive change by engaging and partnering with issuers when they need to raise funds, pushing for sustainability commitments and accelerating change.
From a sustainability perspective, active engagement with issuers is essential to delivering impact and driving value for investors.
Engagement is not only about partnering with issuers that already demonstrate a deeply unified approach to ESG, but also about engaging with those with less advanced sustainability practices. This can be a direct way to influence positive change.
Is ESG investing just a fad?
Mr Rhee: No, I don’t see ESG investing as a passing fad. I am aware that a lot of people are talking about the popularity of ESG and sustainable investing and that some fund managers are jumping on the bandwagon by labelling funds as sustainable without any meaningful changes in their investment processes. We are concerned about the rising tide of greenwashing, especially in investment products.
However, ESG is not merely a consideration when it comes to how people invest because it has become increasingly evident that it affects how people live. The rise in ESG interest is directly tied to the growing realisation that the way we live or invest is not sustainable and we must make changes.
In Singapore, the effects of climate change will be very pronounced. Data from the Centre for Climate Research Singapore indicate that we could see average daily temperatures rise by 1.4 deg C to 4.6 deg C, more intense and frequent rainfall, and average sea levels rise by up to 1m in about 80 years.
The Singapore Government is taking this seriously, unveiling the Singapore Green Plan 2030 this year, which commits us to the Paris Agreement and the United Nations 2030 Sustainable Development Agenda, with the goal of achieving long-term net-zero carbon emissions.
Governments, corporations, and individuals globally are rising to the challenge, recognising that slowing down climate change will require a concerted, long-term effort. And markets are responding to this.
As investors continue to influence change through ESG investing, ESG considerations will become so core and integral to the investment decision-making process that sustainable portfolios will no longer be termed “ESG” or “sustainable” investing in the future. These will simply be regarded as fundamental to any basic investment review.
What are the telltale signs of greenwashing? How can investors be assured that companies stay true to their ESG commitments?
Ms Albrecht: Greenwashing is an important concern. The best defence against it is to do your homework.
For investors looking to incorporate ESG into their investments today, we would emphasise the importance of using an investment manager with a proven track record of delivering strong performance and impactful ESG solutions.
Several years ago, for example, we created our own proprietary ESG scoring system at Pimco for green bonds which represents our view of the “greenness” or green quality of the bond. This score is based on three main criteria:
First, we evaluate the alignment between the objective of the green bond and the broader environmental strategy of the issuer firm-wide. This is because we want to encourage issuers to decarbonise their entire business and not only certain activities.
Second, we analyse the evidence of net positive sustainability outcomes on a life-cycle basis, which is relatively straightforward for certain activities like wind and solar, but less so for many other projects and themes, such as energy efficiency, electric vehicles or water management.
Third, we assess whether there are any red flags or controversies, and the green bond’s consistency with market standards such as the International Capital Market Association’s green bond principles.
What role does technology play in ESG investing?
Mr Rhee: One of the major challenges of ESG investing is the lack of disclosure of relevant data, common standards of measurement and standard tools of analysis. Technology can help process the data available and make the investment analysis process more efficient.
This simplifies the process of selecting best-in-class ESG funds and builds and adjusts portfolios to the client’s optimal allocation, all while reducing costs to levels that simply cannot be achieved by traditional financial institutions.
Fintech firms and robo-advisor platforms are revolutionising the delivery of wealth and investment services. Just like Amazon has done for retail and Netflix has done for content, Endowus has harnessed technology to help simplify the process of investing and make it less daunting and less expensive for the average investor.
The objective is to democratise investing and make ESG investing accessible to everyone. For example, the Endowus ESG portfolios are built using the institutional and clean share classes that are typically only available to professional or institutional investors.
Do companies with strong ESG credentials have the potential to perform well over the long term?
Ms Albrecht: There is an increasing recognition that growth must be sustainable: For financial markets to prosper over the super secular horizon, growth cannot come at the cost of society.
Sustainability factors are becoming increasingly material and driving markets. More broadly, we believe that incorporating material ESG factors into the investment process delivers a more holistic view of the risk and return potential of investments, especially over the longer term.
From a company-specific perspective, Pimco’s view is that bottom-up ESG research can help avoid significant downside risk.
In-depth research likely also helps identify high-quality management teams able to value and manage critical factors such as human capital, consumer trust, product safety, supply chain and operating efficiency.
Know the experts
Mr Samuel Rhee, chairman & chief investment officer, Endowus
With over 27 years of investment experience, Mr Rhee is a widely recognised, leading fintech industry expert, investor and entrepreneur in Asia. He has managed investment portfolios of more than US$10 billion while working with the largest financial institutions in the world.
Mr Rhee was formerly the chief executive officer and chief investment officer at Morgan Stanley Investment Management in Asia.
Ms Olivia Albrecht, head of ESG business strategy, Pimco
Joining the investment management firm in 2011, Ms Albrecht is currently an executive vice president based in Pimco’s Newport Beach office in California.
Before joining Pimco, she worked in private equity at Cerberus Capital Management in Frankfurt, Germany. She has also held positions at Lockheed Martin, Mubadala Development Corporation in Abu Dhabi, and the US Department of Defence.
Start your ESG investing journey with Endowus here.
This article is the final instalment of Invest in Impact, a three-part series produced in partnership with Endowus. Click below to read the first two instalments.
Part 1: Investors bank on green shoots
Part 2: S’pore’s private sector heeds call for green finance growth
Brought to you by Endowus and PIMCO
Investment involves risk. As such, the capital value of investments and the income from them may go down as well as up and may become valueless. You should carefully consider whether any investment views and products/services are appropriate in view of your investment experience, objectives, financial resources and relevant circumstances or seek financial advice via Endowus’ platform. Socially responsible investing is qualitative and subjective by nature, and there is no guarantee that the criteria utilised, or judgment exercised, by PIMCO will reflect the beliefs or values of any one particular investor. Information regarding responsible practices is obtained through voluntary or third-party reporting, which may not be accurate or complete, and PIMCO is dependent on such information to evaluate a company’s commitment to, or implementation of, responsible practices. Socially responsible norms differ by region. There is no assurance that the socially responsible investing strategy and techniques employed will be successful. This advertisement has not been reviewed by the Monetary Authority of Singapore. Issued in Singapore by ENDOW.US Pte Ltd (Registration No. 201708816N) and PIMCO Asia Pte Ltd (Registration No. 199804652K). ©2021 PIMCO.
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