Investors are increasingly targeting a double bottom-line approach – to do well financially by doing good socially and environmentally while promoting high standards of governance. The conventional risk return equation is rewritten to incorporate ESG considerations – this is the belief driving the ESG agenda today, becoming material to investment returns. As ESG issues are becoming more important to long-term investors, it can no longer be viewed as a “nice to have”, but a “must have” to conduct responsible business.
Sustainable investing was a consideration that used to matter only to asset managers and investors’ preferences, but this is evolving as well. This is because sustainable finance is moving into the regulatory mainstream, and regulators increasingly see it as a responsibility to promote responsible finance that does both economic and societal good. The emerging practice of ESG and socially responsible investments has received regulatory support in several countries; wherein governments, regulators, asset owners, and asset managers all seem to pull in the same direction and are seizing the opportunity to create businesses of enduring value and profit.
We look to Singapore as a good example, in which the Monetary Authority of Singapore (MAS) aims to turn Singapore into a leading centre for green finance in Asia. Alongside other initiatives and action plans, sustainability-linked loans issued by MAS are developed to support corporates in accessing financing as they invest in green projects and developments. This would not only incentivize the borrowers’ achievements of pre-determined sustainability performance objectives but it also shapes the practice of integrating sustainability and climate-related factors into investment processes. Over time, investors who have made commitments towards sustainable investing would have paved the way for investments in thematic opportunities arising from climate change and integrating sustainability signals into quantitative strategies.
But what does it mean to “invest responsibly”? Responsible investment comprises four streams of intention.
- ESG and ethical themes are considered alongside financial performance when making an investment,
- Throughout the process of researching, analysing, selecting, and monitoring investments, a systematic set of all ESG factors are carefully considered to understand the full value of an investment,
- Being a responsible steward of wealth, and through that, improve a company’s performance in the economy,
- Where the money is targeted, the intention of capital invested should avoid harm, benefit stakeholders, and contribute positively to societal and planetary solutions.
The UN Principles for Responsible Investment provides a blueprint that will shape the future of investing for the next decade; a guide to overcome the barriers of achieving a sustainable financial system.
Investment managers are applying a range of responsible investing approaches, from ESG integration and negative screening to thematic and impact investing. However, there is still a gap between those that claim to be practising responsible investing and those that have embedded these practices through formal policies and accountability commitments. The focus for the decade becomes the extent to which these efforts result not only in better risk-adjusted returns for clients, but also in view of a more stable and sustainable economy.
While historically, ESG integration holds great influence over the final construction of responsible investment portfolios, there has been a shift away from negative screening towards corporate engagement and shareholder action. For investment managers taking a sustainability or thematic linked investment approach, social impact has been the most popular theme, followed by climate action and energy efficiency.
Source: 2020 Responsible Investment Benchmark Report New Zealand
As a global trade and financial centre, what does this mean for Singapore? While this is not a brand-new concept to the financial sector, responsible investment remains a process of exploration, collaboration, and improvement. Nevertheless, the promised land is certain.
In recent years where there has been an expansion of responsible investment initiatives across even the most established areas of finance, there is – with much certainty – growing evidence that demonstrates how the sustainable finance policy over the last year has been characterised by strong growth, increased scope, and greater maturity. The drivers underpinning the strong investor uptake as well as the surge in consumer interest are contingent on several factors.
- Stronger brand value: to protect or strengthen brand and reputation, responsible investment facilitates favourable social interactions with stakeholders such as clients, regulators, and employees
- Better risk-adjusted returns: to deliver better returns for clients and outperform the benchmark and peers
- Improved system sustainability: to fulfil fiduciary obligations and contribute to better overall financial system stability and performance
- Real-economy outcomes: to drive outcomes that translate to positive financial impact that can make a difference in our world today.
Source: Key findings from the 2020 Responsible Investment Benchmark Report New Zealand provide more information on the growth, depth, and performance of the responsible investment market
How we define responsible investment goes back to the core premise of ESG and corporate sustainability. By definition, businesses practise “corporate sustainability” as a business approach that creates long-term stakeholder value by managing risks and embracing opportunities through the optimization of the economic, environmental, and social bottom-lines. Similarly, as with a traditional corporate purpose, corporate sustainability values profits – without it, companies would eventually go bust. But a sustainable business can continue for the long haul, seeing two parts to the same equation:
- Corporate growth and profitability are important; but so are
- Societal goals that demonstrate the organisation’s commitments to maximise value creation.
The pathway to achieving a sustainable financial system hinges on 3 foundational elements:
- Changing mindsets, such that businesses and financial capabilities are understood to operate within natural, human, and social constraints and dependencies;
- Aligning the financial system as a holistic and intergenerational value-creation model that considers financial and non-financial outcomes for multiple stakeholders; and
- Mobilising capital within an economy that serves the needs and long-term wellbeing of the society, while protecting and enhancing natural and human capital.