Sustainable investing themes of ‘climate’ and ‘carbon reduction’ gaining favour among fund investors
Investors should channel money into growth sectors such as education, health and clean energy if they choose to withdraw from companies scoring poorly on environment, social and governance issues, according to experts in sustainable investment.
This way, they can not only cut downside exposure to companies that flout environmental rules, have dubious labour practises and lack board diversity, but also gain from growth opportunities in those that tap unmet demand for better living and a reduction in social inequality through education and health care.
“If clients want to exclude from their portfolios companies producing weapons, tobacco and alcohol for moral and ethical reasons, I would explain to them that it will result in certain distortion to [the risk-return profile of] their portfolios,” Hermes Investment Management head of sustainable investing Andrew Parry said.
“To compensate, I would encourage them to substitute stocks in consumer staples that can provide similarly strong cash flow and dividends.”
London-based Hermes manages 33 billion pounds (US$45.5 billion) of assets and claims to have one of the world's largest corporate stewardship operations, advising clients on governance issues who own some US$450 billion worth of assets.
Asia outside Japan saw US$52.1 billion of funds managed with sustainable investment strategies in 2016, up 16 per cent from 2014, according to a report by the Global Sustainable Investment Alliance.
But the figure is a fraction of the US$12 trillion reported in Europe, US$8.7 trillion in the US and US$473.6 billion in Japan.
Melissa McDonald, head of responsible investment at HSBC Global AM, said private bankers have shown “positive interest” in ethical investment practises even as Asia’s public pension schemes have yet to show systematic adoption.
“The big message I got was that they really want to invest responsibly, but there was a lack of products available,” she said.
HSBC Global AM, which managed US$469 billion of assets at the end of last year, has three UK-managed equity and bond funds under the themes of “climate change” and “lower carbon” available to investors in Hong Kong and Singapore. The bank launched two lower carbon funds targeting Hong Kong retail investors on Monday.
Parry said he has found retail investors receptive towards themes involving sustainability.
“Two years ago, it was very hard to get them to engage in conversation … there was too much prejudice that sustainable investment means giving up some returns,” he said.
But the data suggests otherwise, as the MSCI ESG Emerging Market Index has outperformed the MSCI Emerging Market Index by 16 per cent in the past five years, according to McDonald.
Asset managers attribute the sector’s upbeat performance to factors that include rising consumer demand for sustainable products.
Gabriel Wilson-Otto, an executive director at Goldman Sachs, said data disclosure in Asia has increased as more jurisdictions stepped up environment, social and governance (ESG) reporting requirements and third party data providers streamlined data access.
“People have long been using ESG tools but many have never called them that … they have historically been looking at these issues in a more qualitative way,” he said. “We can now use a broader set of hard data to benchmark ESG performance, compare companies [and to] supplement traditional fundamental analysis.”
He noted that many listed companies in Asia go beyond the minimum environmental and social disclosures required, providing more numeric data than even their US counterparts.
But Asian companies still lag US peers in the disclosure of environmental and social targets and policies, he said.
While HSBC Global integrates ESG considerations on portfolios under its management, McDonald said only some of its investment products are sold with a “sustainability label” vetted by an internal “sustainable investment expert group” to ensure consistency.
To integrate ESG considerations into its investment process, HSBC’s fund managers rely on third party evaluation data as well as its own scoring system.
Investors in different nations tend to have different approaches in how they rate sustainability, McDonald said. For example, in France investors often engage in “positive best in class screening” that removes a certain percentage of bottom-scoring companies from their investment radar.
Dutch investors often prefer “norm-based” investing, which excludes violators of the 10 principles set out by the United Nations Global Compact.
In Britain, institutional investors are more inclined to take a “stewardship approach” by demanding disclosure of ESG risks and mitigation plans.
The engagement model is preferred by Hermes.
“The only true form of impact that you can have in equities is to engage with the companies, because that is the only way you can change their behaviour,” Parry said.