Commentary: Why ESG Investing Must Matter to Retail Investors

Date: June 24, 2024

Climate Crisis

Today’s investment landscape is marked by the growing importance of ESG (environmental, social & governance) considerations, thus requiring investors to understand relatively new terms like “ESG,” “sustainability,” “decarbonisation,” “greenhouse gas (GHG),” “net zero targets,” “greenwashing,” “COP28,” “carbon credit,” and “carbon trading”.

Underlying the use of these terms is a warning issued by scientists that swift and drastic action is necessary to avert irrevocable damage to the planet caused by rising GHG emissions. These emissions, which trap heat in our atmosphere leading to global warming, come from various sources, such as burning fossil fuels (like coal, oil, and gas), agricultural practices, industrial processes and transportation.

As many have undoubtedly experienced or seen first-hand, extreme weather events have already caused death, destruction, and hunger. Rising global temperatures and changing weather patterns have also contributed to supply chain disruptions and ecosystem losses.

If left unchecked, the situation can only get worse, so it’s crucial that everyone collectively transitions to clean energy sources, while protecting the ecosystems that provide us with clean air, water, and natural resources.

Just as important from an investor’s viewpoint is the need to understand not just the terminology but also the issues at stake, given that the corporate sector is being increasingly pressured to act as responsible environmental citizens.

It’s a Global Movement, not a Fad

The call for urgent global action has generated a multifaceted approach involving governments, businesses, non-profit organisations. academia and individuals to safeguard our planet’s future. These actions can have significant effects on corporates, both direct or indirect. Among the steps which have been taken are:

• Countries are committing to reduce GHG emissions and transition to renewable energy sources;

• Efforts to restore forests, protect biodiversity, and conserve natural habitats are gaining momentum. The projects aim to absorb carbon dioxide and mitigate climate impact;

• The global community is investing in climate resilience by allocating funds for adaptation and mitigation projects.

• Global standard setters, supranational organisations, and regulators are coming together to agree on global frameworks and standards to help companies adopt consistent and comparable information and data for disclosure and measurement.

Notably, millennials, Gen Z, and even older generations are helping to propel the ESG movement, demanding actions to combat climate change, promote social justice, and uphold ethical governance.

Significant Influence on Value of Businesses

The crisis has prompted companies to adopt sustainable practices, reduce waste, and commit to net-zero emissions. At the same time, many companies are grappling with risks arising from extreme climate events that disrupt ecosystems, supply chains, and business operations.

It is important that investors understand that ESG investing is about having a holistic understanding of all material risks and opportunities that a business faces, including sustainability-related risks. ESG is therefore not a trade-off; it is robust investment analysis. There is research which indicates that companies that are able to manage their financially material ESG risks and opportunities tend to outperform others, thus enhancing shareholder value.

Therefore, it is becoming increasingly necessary to consider ESG factors alongside financial metrics in order to arrive at a holistic investment profile.

ESG Investing is here to Stay

What this means is that traditional financial metrics no longer tell a complete story about a company’s performance and suitability as an investment.

Investors need to also read company’s sustainability reports in addition to their annual reports, and then make the buy or sell decision based on the company’s overall merits as an investment. Investors will have to check on the following primary components of SGX’s sustainability report requirements, i.e.

1. Material ESG factors
2. Climate-related disclosures
3. Policies, practices and performance
4. Targets
5. Reporting frameworks
6. Board statement

Investors must also be vigilant about “greenwashing” – a practice where companies overstate or exaggerate the eco-friendliness or sustainability of their products and services or portray them as environmentally friendly but are unable to back up their claims with proper, objective evidence.  To safeguard their investments, it is prudent for investors to check whether what the companies have portrayed in the sustainability and annual reports are factually true and effective. This can include benchmarking companies’ climate commitments against the latest science, or checking if business processes have been independently certified as sustainable (for example, a company operating in the palm oil value chain may obtain certification by the Roundtable on Sustainable Palm oil (RSPO)).

To protect investors from greenwashing, it is important that regulatory authorities such as the Monetary Authority of Singapore (MAS) and the Accounting and Corporate Regulatory Authority (ACRA) work to improve the consistency, comparability and reliability of sustainability reporting. To this end, we note that SGX Regulation (RegCo) has previously amended its Listing Rules to align climate-related reporting requirements with the recommendations of the Task Force for Climate-related Financial Disclosures (TCFD), and has recently consulted on further amendments to align with the ISSB standards, which builds on the TCFD recommendations.

Duty of Investors to Learn & Engage

Amidst the global ESG movement and trillions of dollars invested in climate-related endeavours, today’s retail investors must therefore acquire new knowledge in ESG investing. Just as they once learned to analyse company financial statements and interpret annual reports, now they also need to read and understand ESG metrics to evaluate the effect of ESG-related risks and opportunities on the company’s business prospects and financials. Gaining more insightful understandings of the risks/opportunities faced by listed companies is useful for investors to review, understand and vote on resolutions, and hold the companies accountable.

SIAS recognizes that sustainability concepts may be new to many investors. ESG investing is about convergence of profits and purpose. Education is the best safeguard against greenwashing and protecting investments. To enhance the understanding of ESG among retail investors, SIAS will collaborate with CFA Society Singapore (CFAS) to offer a free 2-hour introduction webinar on ESG Investing.  The webinar will share how investors can integrate ESG factors into investment decisions, not merely just to seek financial returns, but also to contribute to positive social and environmental changes.

 

David Gerald
Founder, President & CEO
SIAS