With ESG moving mainstream, how can you invest in the solutions that will transform our world? In this article, we discuss what is ESG investing and whether it is possible to balance purpose with profit.
ESG or Environmental, Social and Governance is more than a buzzword. It is now mainstream, and many companies consider it essential to their existence.
Patagonia, a US outdoor clothing retailer, is a great example. Back in 1985, its founder, Yvon Chouinard, pledged 1% of its sales as part of the 1% For the Planet initiative. Since then, it has also come up with many other initiatives as it embraced the reduce, reuse and recycle philosophy, which seems to be contrary to what a brand that sells clothing does! Internally, Patagonia also prioritises its employees and workplace culture.1
Patagonia was probably a pioneer in letting its purpose drive business decisions. But increasingly, companies are starting to realise the negative impact their operations can have on the planet and its people. With a clear and defined ESG strategy, companies can minimise these negative impacts and, where possible, turn them into positive ones.
Patagonia, a US outdoor clothing retailer, is a great example. Back in 1985, its founder, Yvon Chouinard, pledged 1% of its sales as part of the 1% For the Planet initiative. Since then, it has also come up with many other initiatives as it embraced the reduce, reuse and recycle philosophy, which seems to be contrary to what a brand that sells clothing does! Internally, Patagonia also prioritises its employees and workplace culture.1
Patagonia was probably a pioneer in letting its purpose drive business decisions. But increasingly, companies are starting to realise the negative impact their operations can have on the planet and its people. With a clear and defined ESG strategy, companies can minimise these negative impacts and, where possible, turn them into positive ones.
Read our article The climate change challenge: Why ESG matters even more today to understand sustainability and the biggest challenges facing our planet today.
ESG investing
When it comes to where to put your money, ESG factors serve as the criteria to assess the priorities and performances of companies and countries. Investors are evaluating how far they have progressed with their sustainability efforts and whether they are worth investing in based on their goals.
Today, it is possible to be invest with a purpose and priority, while still making a profit.
ESG investing is when investors apply non-financial factors like a company’s carbon footprint or their Diversity & Inclusion (D&I) policies to identify material risks and growth opportunities. While such metrics are not mandatory in financial reporting, companies are increasingly detailing their disclosures in an annual sustainability report.2
Companies that do not include ESG factors in their businesses will risk being isolated by customers, investors and suppliers. Malaysian company Top Glove found itself under pressure for not addressing ESG shortcomings, making headlines for allegations of forced labour and unacceptable work conditions during the pandemic. This had financial implications for Top Glove. Their sales in North America, its biggest market, fell 68% year-on-year by volume in the March to May 2021 period.3
Today, it is possible to be invest with a purpose and priority, while still making a profit.
ESG investing is when investors apply non-financial factors like a company’s carbon footprint or their Diversity & Inclusion (D&I) policies to identify material risks and growth opportunities. While such metrics are not mandatory in financial reporting, companies are increasingly detailing their disclosures in an annual sustainability report.2
Companies that do not include ESG factors in their businesses will risk being isolated by customers, investors and suppliers. Malaysian company Top Glove found itself under pressure for not addressing ESG shortcomings, making headlines for allegations of forced labour and unacceptable work conditions during the pandemic. This had financial implications for Top Glove. Their sales in North America, its biggest market, fell 68% year-on-year by volume in the March to May 2021 period.3
Funding a sustainable future
If you care about the environmental, you would likely be an active participant in Earth Hour every year where you switch off the lights for an hour. Consider going the extra mile. With ESG investing, you can now invest in a company that cares about its carbon footprint and do more to mitigate the consequences of excessive energy usage.
Or perhaps if you are passionate about social issues like human rights and labour standards. Then the company choose to invest in should place high importance on its internal and external stakeholders, and not compromise on their workplace wellbeing and safety as well as their relations with the local communities.
The most convenient way to find such investments is through ESG funds, which are portfolios of equities and/or bonds that have integrated ESG factors into the investment process.
The fund’s investment committee would seek out companies that meet the required ESG scores and standards. The objective of the fund will be clear from the outset, and companies or countries the fund invests in would have been scrutinised for their ESG criteria. For example, a company with poor management practices or a bad record of reducing its carbon footprint would not be included in the fund.
Funds can also adopt a thematic approach, aligned with Sustainable Development Goals (SDGs) to identify companies with long-term growth potential. The Allianz Smart Energy fund for example, invests in companies that are addressing challenges across energy production, energy storage and energy consumption from across the world. These are companies that focus on everything from renewable energy to efficient buildings and the smart grid to hydrogen technology.4
Or perhaps if you are passionate about social issues like human rights and labour standards. Then the company choose to invest in should place high importance on its internal and external stakeholders, and not compromise on their workplace wellbeing and safety as well as their relations with the local communities.
The most convenient way to find such investments is through ESG funds, which are portfolios of equities and/or bonds that have integrated ESG factors into the investment process.
The fund’s investment committee would seek out companies that meet the required ESG scores and standards. The objective of the fund will be clear from the outset, and companies or countries the fund invests in would have been scrutinised for their ESG criteria. For example, a company with poor management practices or a bad record of reducing its carbon footprint would not be included in the fund.
Funds can also adopt a thematic approach, aligned with Sustainable Development Goals (SDGs) to identify companies with long-term growth potential. The Allianz Smart Energy fund for example, invests in companies that are addressing challenges across energy production, energy storage and energy consumption from across the world. These are companies that focus on everything from renewable energy to efficient buildings and the smart grid to hydrogen technology.4
Balancing purpose with profit
ESG funds are now growing in popularity, but you may question whether such strategies can translate into profits for your portfolio? And can ESG investing weather the market volatility? Here’s what some research shows:
The numbers do point to the potential for investors to balance purpose with profit. But ESG funds, like others, are subject to market uncertainties as well. The recent downturn in global markets is evidence that ESG portfolios can underperform but what it’s clear is that the momentum behind sustainability from the investment community is not slowing down.
The future, as they say, is in our hands. Putting the planet’s needs has now become a priority, while human rights and ethical issues have been accelerated due to events brought about by the pandemic. With ESG investing, you can invest responsibly knowing that your money is going to something you care about and that you’ll reap the benefits financially and societally in due time.
- S&P Global Market Intelligence research showed that ESG funds outperformed the S&P 500 index in the first year of the pandemic.5
- Morningstar reported that globally, sustainable funds saw inflows of $32.6 bn in Q2 2022, stronger than the broader market which saw outflows of $289 bn.6
The numbers do point to the potential for investors to balance purpose with profit. But ESG funds, like others, are subject to market uncertainties as well. The recent downturn in global markets is evidence that ESG portfolios can underperform but what it’s clear is that the momentum behind sustainability from the investment community is not slowing down.
The future, as they say, is in our hands. Putting the planet’s needs has now become a priority, while human rights and ethical issues have been accelerated due to events brought about by the pandemic. With ESG investing, you can invest responsibly knowing that your money is going to something you care about and that you’ll reap the benefits financially and societally in due time.
Baiduri Capital has made ESG investing easy and accessible with over 30 unit trust funds. Four funds, Allianz Global Sustainability Fund, Allianz Smart Energy Fund, Manulife Sustainable Asia Bond Fund and United Smart Sustainable Singapore Bond Fund have been launched in response to increasing investor interest in maximising the planet, people and profit. If you have further questions about your ESG investment journey, reach out to the team at Baiduri Capital at +673 226 8588 (during office hours) or [email protected]
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1https://ceoworld.biz/2022/10/14/4-key-leadership-lessons-from-patagonia-founder-yvon-chouinard/
2https://www.cfainstitute.org/en/research/esg-investing
3https://asia.nikkei.com/Business/Companies/Top-Glove-faces-ESG-reckoning-on-forced-labor-allegations
4https://sg.allianzgi.com/-/media/AllianzGI/AP/Singapore/Documents/sg-allianz-smart-energy-onepager-en.pdf?v=20220104
5https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/esg-funds-beat-out-s-p-500-in-1st-year-of-covid-19-how-1-fund-shot-to-the-top-63224550
6https://esgclarity.com/sustainable-funds-stickier-during-market-volatility/
3https://asia.nikkei.com/Business/Companies/Top-Glove-faces-ESG-reckoning-on-forced-labor-allegations
4https://sg.allianzgi.com/-/media/AllianzGI/AP/Singapore/Documents/sg-allianz-smart-energy-onepager-en.pdf?v=20220104
5https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/esg-funds-beat-out-s-p-500-in-1st-year-of-covid-19-how-1-fund-shot-to-the-top-63224550
6https://esgclarity.com/sustainable-funds-stickier-during-market-volatility/
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