Monday, 18 October 2021
Written by Royce Tan, Chief Market Insights Officer of GAX MD
THE term ESG has been gaining prominence in recent years, especially among the younger generations. They place importance on investing for the right cause as they take into account the future worries of climate change, sustainability and the scarcity of natural resources.
The Covid-19 pandemic which plagued the economy last year, had only catalysed the boom in ESG investing, after it laid bare many of the social, economic and environmental issues of many countries and corporations.
Despite the turmoil in the global markets last year, ESG-related funds and ESG-compliant equities have been outperforming their peers and even gone through lower volatilities in prices.
That drew the attention of investors towards the resilience of funds and companies with strong ESG mandates as they seek for sustainable investments that would reap value for them over the long-term.
Before we dive into ESG investing, let us first go through the basics of ESG. What is ESG?
The “E” part of ESG looks at the impact of a company towards the environment and nature, from its products, supply chain, all the way to its manufacturing processes. This includes factors such as carbon emissions; usage of renewable energy; recycling policies; climate change policies; water usage and conservation; treatment of animals and green technology.
“S” stands for social, which evaluates how well a company's stakeholder management is, involving its workforce, the community and locality it operates in and the social factors that may affect a company’s financial performance. This comprises factors such as diversity and inclusion; gender equality; providing basic rights for employees and consumer protection.
The “G” or governance, looks at the independence of a company's board, competence and effectiveness of the management, corporate ethics and decision making. Governance often covers the importance of having the roles of a chairman and chief executive officer (CEO) to be separated to prevent one from having absolute power; having a right balance of executive and non-executive directors with strong elements of gender and racial diversity; strict anti-corruption policies and strong internal controls in place.
More than just about environmental concerns, the principles of ESG can be summarised as the best practices of doing what is right. As simple as it may sound, these are oftentimes forgotten and overlooked during the course of generating financial returns for a company.
A classic example was exactly 20 years ago, involving a then-Wall Street darling, Enron Corp, a Texas-based energy company that collapsed due to an accounting scandal which eventually led to its bankruptcy. With over USD63 billion of assets, it was the largest bankruptcy as of 2001.
The concept of ESG investing is nothing new and may even be traced back to at least 100 years ago, when churches had a policy of not investing in companies that engaged in gambling businesses or those that were against their religious beliefs, in the management of their surplus funds. The Muslims established investments that complied with the Shariah law, which prohibits investments from gambling, firearms and alcohol, for example.
Today, ESG is increasingly being recognised as the barometer to identify sustainable investments that are able to achieve value in the long-term. It is no longer just the figures on the balance sheets and profit or loss statements that matter. The adoption of ESG measures and practices are now deemed as a need, moving forward and not a want as investors would prefer to stay away from companies that are not sensitive towards social, environment and governance issues.
But then, there is always the question if ESG investments can truly generate higher returns. It has always been a subject of debate. There has yet to be sufficient academic and research data to strongly support this but what we have seen over the past several years is certainly leaning towards that direction. The Global Sustainable Investment Alliance (GSIA), in its latest Global Sustainable Investment Review (GSIR) biennial report, revealed an increase of 15% in the assets under management (AUM) of sustainable investments from USD30.68 trillion in 2018 to USD35.50 trillion in 2020.
Quoting Blackrock, the largest asset manager in the world, it said that:” Our conviction is that companies perform better when they are deliberate about their role in society and act in the interests of their employees, customers, communities and their shareholders”.
ESG investing with MYTHEO
MYTHEO has just launched its fully ESG-themed portfolio, known as the MYTHEO Global ESG.
The portfolio invests primarily in ESG-related equity ETFs, particularly those that have an investment policy of taking into consideration the environment, social and corporate governance. There are 11 ETF in the portfolio’s investing universe.
This will allow investors to align their financial goals with the values that they strongly believe in as they start to look beyond balance sheets and profit or loss statements to identify investments that are responsible and sustainable.
The portfolio was back-tested all the way to July 2006, which yielded an annualised net return of 9.27% as compared to the MSCI ACWI Index, the global equity index, which generated 8.93%. It should be noted that the past performance is not an indication of future performance.
Start your ESG investment journey with MYTHEO today!
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