Responsible investing – the way to optimal returns and a sustainable future

For investors, sustainability reports when used with traditional reports makes investment analysis comprehensive. The indices will help investors assess the sustainability practices of SGX listed companies and identify regional leaders in Singapore

Although the call to include ESG factors in decision making started decades ago, the momentum to include ESG criteria is getting stronger because of issues such as climate change (including extreme weather events and pollution), human rights abuses (including child labour and exploitation of workers) and the financial crisis of 2008 which is attributed partly to poor governance.

The personal and public choices we make as consumers, investors, companies and regulators have a direct bearing on the planet, people and profits. We are in a downward spiral of the environment affecting businesses and business practices affecting the environment. Sustainable practises that take into account ESG criteria can turn this into a virtuous cycle. Companies and Investors (especially institutional) are increasingly considering ESG criteria in their decision-making. ESG Integration is the second most popular investment strategy (USD 12.9 Trillion) after negative screening. (USD 14.4 Trillion)(SGX)

Globally the momentum toward Responsible Investing is growing. The UN led Principles of Responsible Investing (PRI) is the world’s leading advocate for Responsible investing for institutional investors. The number of PRI signatories has grown from 100 signatories with assets under management (AUM) of USD 6.5 trillion in 2006 to 1500 signatories with AUM of USD 62 trillion in April 2016. PRI signatories now account for more than half of the world’s institutional assets. (PRI)

Asia, as a region, lags behind in terms of ESG integration and adaptation. The trans boundary haze that has been plaguing the region for decades now is a consequence and reflection of this. Explosive growth in global demand for palm oil and paper has led to production of palm oil and paper through unsustainable means including large-scale use of fire to clear land, deforestation and peat drainage. This has caused air pollution in the region and globally for decades.

As consumers we have created the demand for palm oil and paper products. Along with our banks, as investors we have funded growers and traders. As a result, we have a direct connection to the unsustainable practices on the ground.

The public outcry after the haze of 2015 has led to a call for actions from all stakeholders. Haze linked paper products were pulled off the shelf. The Association of Banks in Singapore came out with guidelines in October 2015 for its members to integrate responsible financing standards into their business models. However to date, none of the banks have publicly published their policy framework supporting responsible financing.

The decades long regional haze issue exemplifies how meeting the basic and lifestyle needs of an ever-growing population has pitted economic growth against the environment. Sustainable ways of consumption and production are the dire need of the hour. This transformation creates opportunities for sustained profits too through improved operational efficiencies, better use of resources, innovation and disruptive technologies. Sustainable investing can provide the much needed capital for this transformation.

According to Ceres (a non profit organisation advocating sustainability leadership) Sustainable investing is not about investing to achieve environmental or social goals and it does not ask investors to accept compromised returns. It is about integrating ESG information with traditional financial analysis so that investment decisions are based on full understanding of short term and long-term risks and opportunities – in line with investor objectives to maximise risk adjusted returns.

There is increasing academic research and evidence in support of the business case for Sustainable Investing. In an 18-year study (1993-2011) by Harvard Business School, 90 companies with strong sustainability policies and practises outperformed a similar sampling of 90 firms having low sustainability standards. The annual above average market return for the high sustainability sample was 4.8% higher than for their counterparts with lower volatility. The high sustainability companies also performed much better as measured by return on equity and return on assets. Regionally, 87% of Asian Sustainable investors view ESG as providing positive risk adjusted returns (SGX)

The trend towards Responsible investing set by Institutional investors is influencing retail investors too. According to a study by Morgan Stanley in early 2015, over seventy percent of active individual investors (71%) describe themselves as interested in sustainable investing, and nearly two in three (65%) believe sustainable investing will become more prevalent over the next five years.
Singapore investors can capitalize on the momentum toward sustainable investing and optimize profits by equipping themselves with the knowledge required for 21st century investing. Technology has made available a wealth of information and tools required to do.

Investors can engage in sustainable investing through various ways such as:

• Shareholder activism – using shareholder rights to influence a company’s behaviour particularly towards better ESG practices. This can be done through the dialogue process or shareholder resolutions. A recent Harvard Business School study shows that ESG and Sustainability issues are the fastest growing issue behind shareholder proposals.

• Positive/Best in class screening – investing in companies that are leaders in sustainability practices

• Divesting /Exclusionary screening – removal of certain sectors/companies from a portfolio based on ESG criteria

Investor action and engagement is of particular importance for collective effort on issues like the haze because of its high impact, high likelihood of recurrence and urgency required in finding a solution. Investors especially those investing in agri businesses and banks can play their part by investing responsibly using ESG criteria. Using their shareholder rights they can raise the issue of traceability of raw materials, responsible supply chains (clean, audited and traceable) and the issue of responsible financing through all available forums such as shareholder meetings, AGM’s and through investor associations.

Sustainability reports are a critical tool for investment analysis and decision-making on the lines mentioned above. It is important to understand the context for the report, whether the report focuses on the most impactful activities of the company and above all if the reports are credible. The Investor’s Guide to Sustainability Reports (SGX) is a good starting point to understand how to read and make use of these reports

The SGX has opened the door to transparency of sustainability practices. In alignment with the Sustainable Singapore Blue print, Haze free ASEAN 2020 and COP 21 this creates a range of sustainable investing opportunities. Investors can capitalise on this by engaging with companies to create shared value and a collective sustainable future.