Sustainable investing, or environmental, social, and governance (ESG) investing has been around for quite a while, but it is increasingly gaining traction as the climate crisis deepens. The practice of investing your money in companies that adhere to certain principles or policies that align with your personal beliefs, whether it be renewable energy, animal welfare or climate change, is one that is grabbing the global spotlight.
Unfortunately, on average, only 26 percent of Singapore’s adult population have heard of ESG investing, according to a survey by Fidelity International.
In terms of awareness, the survey – dubbed Asia Sustainable Investing – placed Singapore at the bottom of the region. Across Asia, 43 percent of the respondents said they were aware of ESG investing, 57 percent wanted their money to make a positive change in the world, and 63 per cent agreed that it was important to act responsibly and sustainably as investors.
But how should they go about doing so and what effects does this have on the global market outlook?
Bubble, or more than that?
Hedge funds and big institutional investors have committed to decarbonising their portfolios. One example is BlackRock, an organisation that holds more assets than any other company in the world, has started using its shareholder voting power more often to pressure companies to disclose and reduce their climate risks.
Beyond that, investors are banding together to name, shame, and reform major polluters. Powerful financial groups are calling out heavy emitters by name. In March, investors with $54 trillion at their command published detailed assessments of how 159 companies measure up against a benchmark for emissions reductions, governance, and disclosure.
Governments are also jumping on the bandwagon and championing change. The G7 nations have committed to a “green revolution” that would limit the rise in global temperatures to 1.5C. They have also agreed to step up action on climate change and renewed a pledge to raise $100 billion a year, through to 2025, to help poor countries cut emissions. The G7 will end the funding of new coal generation in developing countries and offer up to £2billion ($2.8billion) to stop using the fuel.
How big before the weight sets in?
Unfortunately, globalisation often enables bending around new regulations. Just look at how quickly manufacturing shifted away from rich countries as workers’ pay increased. In the finance industry, tech giants have parked trillions of profits in tax havens like Ireland and Luxembourg.
On the topic of finance, markets react to regulations and legislations from governments—but the reverse is true as well. Bull and bear runs do not last forever. And governments have a bad habit of rolling back regulations when times get tough.
Ultimately, there will be casualties. Sustainable investing is an investment approach that considers environmental, social and governance (ESG) factors, alongside financial factors, with the aim of generating potentially better returns and to manage risk. It involves investing in companies that demonstrate strong sustainability credentials and that focus on their stakeholders.
So, what should I keep an eye out for?
Major climate reforms are making their way through the U.S. Congress. The French parliament is struggling with a massive package as well. And Chinese leaders are rolling out a nationwide carbon market within the next few weeks. Governments have the power to energise climate investment—or hobble it.
The COVID-19 pandemic has severely disrupted supply chains, with shortages of everything from microchips to lumber to rental cars. This has prices of many goods and services soaring—including a material crucial for solar panels that has recently quadrupled in price.
Closer to home, the Singapore Exchange offers suites of ESG investments in different asset classes, including ESG-linked equity index derivatives, sustainable bonds, ESG-related commodity derivatives, ESG indexes and ESG stock ratings.
The silver lining for Singapore is that the appetite for sustainable investing is growing, with 49 percent of the survey respondents who were not originally aware of ESG investment saying they were now interested in it. Combined with the 17 percent who were aware of ESG investing and would consider it in the future, a total of 66 percent of Singaporean investors are considering sustainable investing.
Finally, the financial industry also needs to play a role in raising awareness and addressing any concerns about ESG products to help retail investors make informed decisions on investing their savings.