Growing Interest in Sustainable Investing
Investors are increasingly integrating ESG criteria into their investment processes, as studies show these pillars have a measurable impact on financial performance.
In our recent mid-year outlook event held in Singapore in early July, our clients raised and voted on the questions that interested them most.
Two popular questions asked were how they could get started in sustainable and impact investing, and what type of products and services are already available. This reflects a growing interest in sustainable investing in Singapore, and Asia more broadly, albeit from a low base.
Clients' expectations and preferences differ significantly, and this explains the need for a wide variety of investment solutions. As they become more familiar with what is available, we often see their preferences change as they explore sustainable investing more deeply.
When discussing with clients for the first time, it also becomes apparent that the terminology and the many three letter abbreviations can be quite confusing:
- ESG (Environmental, Social and Governance)
- SRI (the letters originally stood for "Socially Responsible Investing", yet are now also used for "Sustainable and Responsible Investing")
- Negative Screening, Triple Bottom Line, Positive Screening, Best in Class, Impact Investing
- PRI (United Nations' Principles for Responsible Investment)
- SDGs (United Nations' Sustainable Development Goals), etc.
Of all the above terms, ESG is most useful as a starting point, as it identifies three key pillars of sustainability.
The term was coined in 2005, and captured the changing zeitgeist of the time, even though the history of sustainable investing goes back much further.
- Al Gore's 2006 documentary, An Inconvenient Truth, reflected the growing awareness of the Environment, the "E" of ESG, and contributed significantly to investors worldwide paying more attention to the environmental impact of their investments, especially those related to pollution and global warming.
- The collapse of Enron in 2001 and WorldCom in 2002, as well as the wave of poor corporate governance exposed by the Global Financial Crisis in 2008, highlighted why good Corporate Governance, the "G" of ESG, must be increasingly taken into account, and sharpened investors' focus on this area.
- The "S" of ESG is Social, and focuses on topics such as Employee Diversity, Human Rights, Consumer Protection and Animal Welfare, all of which have become increasingly appreciated by investors over the past 20 years.
Study after study has shown that companies' approaches to these ESG pillars has a measurable impact on their financial performance, and this evidence has led to investors increasingly integrating ESG criteria into their investment processes.
It is not just doing the right thing - it is also about generating high returns.
In Asia, it has generally been institutional rather than individual investors who have taken the lead.
For example, Temasek has fully integrated ESG analysis into its investment processes and is a strong advocate of sustainable economic and social development.
But there are also some individual investors and family offices marching side by side with these institutional investors, and we even see some private investors actively engaging their wealth managers to develop services in this direction.
Fortunately, BNP Paribas has a long history in offering such investment solutions to our wealth management clients around the world, and we are part of a global banking group with a strong and fully integrated commitment to sustainability and positive impact.
The diagram above reflects more broadly how our clients can work with us to generate a positive impact. Sustainable investments form the core part of this spectrum, which also includes our award-winning philanthropy services.
For investments, "ESG integration" is often a client's initial entry point, seen on the left hand side of the diagram.
This is where we take a traditional investment philosophy and process, whether for advising on equities, bonds or funds, or managing discretionary portfolios, and introduce ESG considerations.
We could, for example, exclude companies whose behaviour is harmful to human beings or the environment, or take into account the financial risks associated with companies' poor ESG practices.
Moving to the next category, "Responsible Multi-sector" investing requires having a clearly defined and transparent methodology for performing ESG analysis, which takes dedicated resources and investment to fully develop.
BNP Paribas chose to develop this capability many years ago, and our clients are now able to reap the benefits.
Here we focus only on the companies in each sector with the best ESG practices, which is a form of "Positive Screening", or "Best in Class" when it comes to ESG, and this leads to investments with an even more sustainable footprint than those with ESG integration.
For investors who want to focus on specific themes, the UN Sustainable Development Goals (SDGs) provide a well thought through and easily understandable set of 17 long-term goals.
The SDGs include goals such as
- Zero hunger
- Quality education
- Clean water and Sanitation
- Affordable and Clean Energy
- Sustainable Cities and Communities, and
- Responsible Production and Consumption
Our "Sustainable Thematic" investing approach for clients focuses on individual SDGs or combination of related SDGs.
"Impact investing" offers the highest level of positive impact by introducing the key notions of intention and measurement.
The investment must come with a clearly stated intention for a specific positive impact at the start of the investment, usually linked the UN SGDs, and this must then be clearly measured.
This appeals strongly to investors who want a direct and measurable impact from their investments.
The diagram aims to provide a summary of the different ways to approach sustainable investing.
In reality, sustainable investments covers a large and rapidly growing universe with multiple dimensions, some of which are not easily described in a single diagram.
What is clear is that sustainable investing, and more generally using one's wealth to have a positive impact, is of growing importance to an increasing number of wealthy individuals and families.
This article was first published in The Business Times, Singapore