Environmental, social and governance (ESG) principles have become more prominent in the investment lexicon, and their reach is only expected to grow as the pandemic changes society’s values. But what is this sustainable investing approach and is it all good? Let’s take a Deep Dive.
3️⃣ Investors who use ESG strategy to screen deals analyse them within these three categories, alongside more traditional financial measures: environmental, which considers a company’s impact on air, land, water, ecosystems and human health; social, which examines a company’s relationships with employees, suppliers, customers and the communities where it operates; and governance, which deals with the way a company is run.
📈 Companies who follow ESG standards are reportedly more likely to outperform their peers in the long-term. This is driven by positive shifts such as reduced operating costs and a more diverse, productive workforce.
“ESG investments appeal to a younger generation of socially conscious investors. With 35 percent of Asia’s wealth expected to change hands in the next five to seven years, ESG is going to be a hard trend for financial institutions in the region to ignore.”
— Debra Walton, chief revenue officer at global financial services provider Refinitiv
BY THE NUMBERS
75% According to Deloitte, 75 percent of global investors applied ESG criteria to at least a quarter of their investments in 2019.
US$40.5 trillion ESG criteria was used to guide investment decisions on US$40.5 trillion of global assets in 2020.
95% About 95 percent of millennials were interested in sustainable investing, found a 2019 Morgan Stanley Institute for Sustainable Investing survey of high-net-worth investors.
43% A 2018 survey found that 43 percent of clients from select private banks who invested in ESG-related products were women.
12% A 2019 study found that only 12 percent of 500 randomly selected ESG reports from Hong Kong-listed companies laid out plans to tackle climate change issues.
QUIZ
What was the third-largest market in the world for sustainable investing in 2018, after Europe and the US?
A. Japan
B. China
C. Russia
Scroll to the bottom of the email for the answer.
DID YOU KNOW?
There is still a lack of understanding about what makes a company ESG-compliant. Parnassus, one of the largest ESG funds, for instance, has a significant amount of shares in tech companies such as Apple and Amazon. But eyebrows were raised in 2019 when Amazon reported a 15 percent increase in its carbon footprint despite efforts to reduce it.
Educational video series The Plain Bagel breaks down the ESG approach and why investors remain divided about it
WHAT'S THE DIFFERENCE?
ESG is often used interchangeably with two other sustainable investing approaches: socially responsible investing (SRI) and impact investing. But there are fundamental differences, particularly in their prioritisation of financial performance.
SRI
Unlike ESG, this approach considers financial returns as secondary to investors’ moral values. Socially responsible investors actively stay away from companies that don’t align with their ethical beliefs or that they perceive to have a negative impact on society. This could include businesses in weapon production, tobacco, alcohol and gambling.
Impact Investing
The main aim of impact investors is to help a business or organisation achieve specific goals that will directly benefit society or the environment. The investor may seek financial returns, but this is, again, secondary to the investment’s social impact.
According to an Asian Private Banker survey with private banks, there is a much higher uptake of ESG-related products among investors below the age of 40.
Asian Private Banker
KEY PLAYER
An Investor To Know
Larry Fink
In his annual letter to CEOs, the founder, chairman and CEO of investment management giant BlackRock noted the trend of more people looking at moving their capital into sustainable strategies. With this, he described sustainable investing as “the strongest foundation for client portfolios going forward”.
FROM THE ARCHIVES
Did you miss our Deep Dive on Why Slacking Off Makes You More Productive? Read it here
ONE FINAL THING
Alternative Meaning
In 2019, ESG became known as the acronym for another phrase: “Extremely Stable Genius”, an expression used by US president Donald Trump to describe his mental state.
NEXT WEEK
The Self-Care Guide For Working Parents
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That's it for this issue. Have a productive week!
The Deep Dive is a weekly close-up look at an idea, issue or trend that’s shaping Asia’s future. This issue was written by Chong Seow Wei, with editing and production by Samantha Topp and Lee Williamson.
We’d love to know what you think of this issue, and future topics you’d like us to cover. Please send your comments to editor@generationt.asia. And if you missed it, don’t forget to check out last week’s Deep Dive, on Why Slacking Off Makes You More Productive.
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