Aside from NFTs and metaverses, another buzzword that has penetrated our daily vocabulary lexicon is ESG Investing. As 2021 approaches the end of its race and passes the baton to 2022, I find myself increasingly intrigued by this concept of ESG investing, not least because all the prominent roboadvisors in my country are introducing ESG-centric thematic portfolios. But what exactly is ESG investing, anyway? Firstly, the background.
Why is ESG in vogue?
- Devastating natural disasters have caused people to come to grips with the existential threat of a climate change crisis. Hurricane Ida unleashed its deadly power in Cuba and the United States in late August and early September and was reported to have caused $95 billion worth of damage. This makes the brutal realities of climate change hit close to home for those of us who may have been nonchalant about the deterioration of our environment.
- Burdened with their parents' and grandparents' decisions that caused the environment harm, Gen Z youth are typically vocal about environment conservation. Gravitating towards socially responsible investing, they don't mind examining their investments a bit closer to see if the firms they are choosing are yielding more benefits or costs to their people and the planet. The Gen Z is a powerful generation, and hence, institutional giants are scrambling to revamp their investment portfolios to better court the Gen Z dollar.
What is ESG investing?
- ESG refers to environment, social and governance. Hence, firms that have high ESG ratings implement commendable practices and policies that not only pay heed to the human rights of their employees, consumers and stakeholders, but also are efficient with the usage of energy and water resources.
- It is perhaps noteworthy that it may not be difficult for firms to obtain ESG compliance, so we must still do our due diligence and analyse whether a firm's corporate social responsibility practices are geared more towards cultivating a squeaky clean public image or supporting both people and the planet.
Where can I find examples of ESG considerations?
- Plenty, it seems. For instance, Hudson Public Properties developed the Epic - a solar-panelled office tower in Hollywood - that is fully leased by Netflix. Prologis, the global industrial giant, sells green bonds that funds the construction of more sustainable warehouses.
- From the perspective of ESG data collection, Blackrock acquired Baringa's Climate Change Scenario Model and integrated it into its Aladdin risk management framework. HSBC also took a minority stake in Radiant ESG, a US-based SEG asset management startup.
- On the crypto front, Celsius has invested $54 million in carbon-neutral Bitcoin mining leader, Core Scientific. Gemini announced in June 2021 that they purchased carbon permits to offset the carbon emissions associated with Gemini's usage of the BTC network in the first six months of 2021.
When are firms recognised for their ESG efforts?
- Firms can verify if they are ESG-compliant by requesting to be rated by Morgan Stanley Capital International's (MSCI) ratings. Ratings range from AAA to CCC.
Who manages ESG-compliant funds?
- In April 2021, Invesco started an ETF for green buildings. It is aptly named the "Invesco MSCI Green Building ETF". Similarly, Foresight also has a FP Foresight Sustainable Real Estate Securities Fund. Or you may wish to stick to the tried-and-tested Vanguard FTSE Social Index Fund (VFTAX).
- In Singapore, Syfe recently launched its ESG & Clean Energy portfolio. Endowus also has a ESG Strategies portfolio that serves as the satellite component of core-satellite investing.
How do ESG-compliant funds perform?
- Erin Lowry has shared in her book "Broke Millennial Takes on Investing" about how the Morgan Stanley Capital International's (MSCI) KLD 400 Social Index does just as well, if not better than the renowned S&P 500.
How do I embark on my journey as an activist investor?
Here are some tips offered by the DBS Singapore market analyst:
1) Research multiple ESG ratings from myriad investment sources
2) Consider market sentiment with respect to ESG issues
3) Keep abreast of current affairs so that you are well versed with the governance practices of diverse companies. Firms with high ESG ratings are expected to suffer less from corporate relationships and labour problems.
Are you into ESG Investing? Share with me your insights below!
