Global fund flows into environmental, social and governance (ESG) investments have seen a flood of money, but the path towards net zero emissions remains narrow, say analysts.
Fund flows into the ESG investment theme have built significant momentum in the past few years, writes UOB Kay Hian Research analyst Adrian Loh in a June 21 note.
Over 2018-2021, global fund flows into the ESG investment theme jumped eightfold, from less than US$20 billion in 1QFY2018 to US$185 billion in 1QFY2021.
"Despite the fact that ESG factors are non-financial in nature, investors are increasingly applying these as part of their analytical process to identify material risks and growth opportunities in their investable universe," writes Loh.
According to Morningstar, global assets under management (AUM) approached US$2 trillion at end-1QFY2021 and this is projected to increase to more than US$53 trillion by 2025, representing more than one-third of total AUM globally.
According to Loh, only 12 Singapore companies listed on the Singapore Exchange (SGX) are ranked by four companies, FTSE Russell, MSCI, Sustainalytics and S&P Global, with S&P Global having the poorest coverage.
“With global AUM approaching US$2 trillion, we look at companies in Singapore that ranked well on ESG scores. The companies that scored well across the four ESG ratings that we looked at were City Developments, DBS, Singtel and SGX,” says Loh.
Besides scoring well on ESG ratings, these companies have a combination of solid growth fundamentals and relatively inexpensive valuations, adds Loh.
Conversely, relatively high-risk companies across the four ratings companies are Jardine Matheson Holdings, Dairy Farm, Yangzijiang Shipbuilding, Hongkong Land and Mapletree Industrial Trust. FTSE Russell, MSCI and Sustainalytics (owned by Morningstar) rated these companies, while S&P Global did not rate them, notes Loh.
While investors can buy their own basket of highly-rated ESG companies, Singapore will unlikely attract an Exchange Traded Fund (ETF) focused on ESG due to its market size and the lack of a meaningful number of highly-ranked ESG companies, says Loh.
“According to our channel checks, it is more likely that an ETF with a Southeast Asian or Asia Pacific focus incorporates Singapore’s highly-ranked ESG companies into its broader portfolio,” Loh adds.
Aside, a JV comprising SGX, DBS, Standard Chartered and Temasek intends to build Climate Impact X, a global exchange and marketplace for high-quality carbon credits by end-2021.
See: DBS, SGX, Standard Chartered and Temasek to jointly develop carbon exchange and marketplace
The two platforms include the carbon exchange which will facilitate the trading of large-scale, high-quality carbon credits through standardised contracts that cater primarily to MNCs and institutional investors; and the project marketplace which will facilitate the purchase of high-quality carbon credits directly from specific projects, targeted at custom purchases.
“While this introduces a market-based mechanism to price carbon, the ancillary effect will be to provide investors an alternative asset class for socially responsible investment purposes,” says Loh.
Meanwhile, OCBC Research analysts Conrad Tan, Eli Lee and Chen Zhenhao note global shifts towards decarbonisation while referencing warnings from global leaders about the state of the climate.
In a June 21 note, the analysts quote Ravi Menon, managing director of the Monetary Authority of Singapore at the launch of Climate Impact X: “For the longest time, the world did not put a price on the carbon emissions that have steadily degraded our environment and now pose serious climate risks. A meaningful price on carbon is critical to create the right incentives to reduce emissions.”
Currently, there are over 60 carbon pricing initiatives worldwide, covering an estimated 21.5% of global greenhouse gas emissions, according to World Bank data. Prices range from less than US$0.10/tonne in Poland to as high as US$137/tonne in Sweden, although these are difficult to compare across countries due to multiple factors including differences in economic sectors covered, specific exemptions, and other policy adjustments, note OCBC Research analysts.
In Singapore, a carbon tax of S$5/tonne has been in place since 2019; the government is reviewing the level and trajectory of the tax post-2023 and is expected to announce the outcome at next year’s Budget, they add.
According to OCBC Research, latest developments suggest that countries that are slow to introduce carbon-pricing schemes will increasingly face difficulties or higher costs in accessing major export markets.
The European Union is preparing to introduce a carbon tax on certain imports that do not embed carbon costs similar to those produced within the EU, or a “carbon border adjustment mechanism”.
The carbon border tax could target steel, cement and aluminium imports. Affected businesses would likely be required to buy carbon credits at prices prevailing under the EU emissions trading system introduced in 2005, where spot prices are currently around EUR50/tonne.
“This is consistent with our long-held view that strong policy support for decarbonisation in the EU will have significant influence well beyond Europe, introducing new risks as well as opportunities for businesses globally,” say analysts.
“Our view remains that global efforts to pursue sustainable, climate-resilient development paths and mitigate the threat of climate change will drive wide-ranging, significant changes to the global economy for years to come,” says OCBC Research.
Various new opportunities are emerging for businesses and investors, including opportunities in decarbonisation technologies such as carbon capture and storage, as well as renewable energy, they add.
“Other segments that also offer excellent opportunities for long term secular growth are companies with indirect exposure to the ongoing decarbonisation of manufacturing, transport, construction and urban design.”
These include suppliers of specialised chemicals, chips or other critical components used in clean air systems to reduce emissions from vehicles and industrial plants and to produce batteries for electric vehicles, as well as sophisticated automation systems to reduce wastage and improve energy efficiency in buildings or manufacturing facilities, add OCBC Research.
“We see even more opportunities emerging as the transition to a low-carbon economy accelerates in the coming years, encompassing all parts of the global economy.”
