What does it mean and why it matters? Social responsibility, purpose, environmental, social, governance (ESG) factors, these terms are no longer just mere buzzwords, they increasingly rank high on the agendas of corporates, governments, and individuals - including investors.
Sustainable investing means using sustainable factors, such as ESG, along with financial factors, to assess companies and assets. It is an umbrella term often used interchangeably with ESG investing, socially responsible investing, and ethical investing, and covers other forms of investing, such as impact investing. While there is currently no standard definition of each factor, “E”, “S”, and “G” generally include the following:
Why sustainable investing and why now?
In recent years, sustainable investing has gradually seeped into mainstream consciousness. We believe it is here to stay, and for good reasons.
Indeed, sustainability is no longer a checkbox exercise in companies’ annual reports, but fundamental to the fabric of modern business. And as investors, how and where we choose to park our money matters—not only to us, but to society at large.
Firms with a strong sense of purpose and that embed sustainability in their DNA tend to perform well. For example, index provider MSCI's 2017 research found that companies with higher environmental, social and governance (ESG) ratings are associated with higher profitability and lower tail risk1 . Another study by the University of Cambridge in 2019 found that Chinese technology small and medium enterprises with gender-balanced management teams performed better during adverse conditions, posting a 19.5% and 24.8% rise in profitability and return on assets, respectively2 .
Investing sustainably need not mean sacrificing returns. On the contrary, research has shown that companies with strong sustainable practices tend to outperform the broader market or peers. For example, over the past five years, ESG leaders in the Emerging Markets (EM) Asia Index beat the broader index by 266 basis points.
Other studies concur:
Bank of America Merrill Lynch’s (BoAML) 2019 research on US equities found that stocks with strong ESG scores outperformed the broader S&P 500 Index by up to 3 percentage points every year between 2014 and 20194 . A 2015 study on public companies across Asia, Europe and North America, by asset manager Robeco and the Hong Kong University of Science and Technology Business School, concluded that Asian equity investors can enjoy higher returns and lower portfolio risk when they consider ESG factors, particularly corporate governance5 .
Sustainability increasingly plays an integral part in investors’ decision-making, investment philosophy and process. The interest is clear: in the United States, sustainable funds’ assets under management surged to a new high in 2019, fuelled by record net inflows of nearly four times compared to the year before6 .
Sustainable funds’ growth trajectory is expected to continue. Institutional investors, including large asset managers and asset owners, are leading the pack, as evidenced by the rising number of signatories to the United Nations Principles of Responsible Investing (UNPRI). The UNPRI are a voluntary set of six principles to incorporate ESG into investment practice. Some companies use the UNPRI as screening criteria to evaluate asset managers.
Examples of institutions serious about investing sustainably include Japan’s Government Pension Investment Fund (GPIF), the world’s largest pension fund, the California Public Employees’ Retirement System (CalPERS)7 and Norway’s Norges Bank Investment Management 8 .
Rising demand for sustainable investments is poised to boost valuations, which will, in turn, benefit investors. As an investor, you can ride this wave by considering sustainable funds and companies or integrating ESG holistically into your portfolio.
