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The investment industry continues to evolve as investors seek ways to improve the investment experience. Trends like technology and passive investing receive wide coverage.Sustainable investing is also gaining traction, particularly the integration of Environmental, Social and Governance (ESG) factors. Chart 1 (below) shows the growth in sustainable assets since 2006,illustrating its significance in the investment world.
Chart 1 : Growth in Sustainable Assets since 2006 (in USD Trillions)
Source: Global Sustainable Investment Review (31 October 2018)
Sustainable investing encompasses a number of activities and strategies, according to the Global Sustainable Investment Alliance (GSIA), which include:
- Negative/exclusionary screening : Exclusion of certain sectors, companies or practices based on ESG criteria
- Positive/best-in-class screening : Sectors, companies or projects ranking better than peers on ESG
- Norms-based screening : Selection against minimum standards based on global norms
- Integration of ESG factors : ESG incorporated in investment process
- Sustainability themed investing : For example, clean energy, green technology or sustainable agriculture
- Impact/community investing : Aimed at solving social or environmental problems
- Corporate engagement and shareholder action : Use of shareholder power to influence corporate behavior
The 2016 Global Sustainable Investment Review by GSIA posits that at least a quarter of global professionally managed assets are managed using sustainable investment strategies. The bulk of the assets are invested using the negative screening strategy, followed by ESG integration, and then corporate engagement.
Investment management is traditionally viewed as a process aimed at delivering returns whilst managing the risk. However, specifically focusing on sustainability means looking beyond the risk/return spectrum. This means aligning investing with personal beliefs,taking ethical and moral considerations into account. Although ultimately resulting in an alignment of interests, the question is whether it comes at the To explore the potential performance conundrum, Chart 2 (below) compares the performance of the MSCI ACWI ESG Leaders Index against the market index and the Morningstar large-cap global equity peer group. The MSCI ACWI ESG Leaders Index is a market capitalization weighted index that provides exposure to companies with high Environmental, Social and Governance (ESG) performance relative to sector peers. The performance suggests that since inception,integration of ESG factors has not come at the expense of performance (Chart 2), although over the last 2 years, ESG funds have lagged. Refer to Table 1 (below).expense of performance.
Chart 2 : ESG Performance Relative to Market Index (Return in USD as at 31 October 2017)
Table 1 : ESG Fund Performance Relative to Market Index (Return in USD as at 31 October 2017)
Source : Morningstar Direct (26 November 2018) – Take note that ESG Funds have a short-term history
The recent Nissan debacle,in which the Chairman was arrested in Japan leading to a 6% fall in the share price, illustrates how ESG is supposed to work. Prior to the arrest, Nissan ranked last among 41 global auto companies ranked by data provider Sustainalytics. Incorporating ESG in the investment process would, therefore,result in the exclusion of such a stock avoiding potential pitfalls.
Therefore, it is likely that sustainable investing will continue to grow, hopefully assisting investors in achieving a better investment experience and in the process creating a better environment.