In recent times, there has been a strong push for sustainability and this stems from the need to address global challenges which include climate change, inequality, and environmental degradation. In this pursuit, organisations, corporations, and individuals have been seeking ways to reduce and improve key environmental and social issues.
One of the increasingly prominent ways to drive these positive changes is through sustainable investing — also known as environmental, social, and corporate governance (ESG) investing.
Spreading across securities, asset classes, investment styles as well as products, sustainable investing has grown in demand over the past few years, attributed nonetheless, by worsening climate conditions including the rise of social activism.
While there are no official definitions of sustainability investment, DBS Treasures Private Client has defined investments that have an MSCI ESG ratings of BBB and above as sustainable. This BBB threshold has been adapted from the inclusion criteria of the MSCI ESG Leaders Index and Sustainable-related funds from leading global asset managers.
The Global Sustainable Investment Alliance defines sustainable investing as an investment approach that considers ESG factors in portfolio selection and management. Meanwhile, the CFA Institute defines it as balancing traditional investing with ESG insights to improve long-term outcomes.
Long-term benefits of ESG investing
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Although some may see ESG issues as a temporary focus, DBS Treasures Private Client believes this is not a passing fad. Instead, it is part of a long-term structural shift in recognising ESG issues that have been around for an extended period of time and have become more present and urgent over the past decades.
The United Nations Climate Change group argues that keeping the rise in global average temperatures within 2° celsius above pre-industrial levels would substantially mitigate the ramifications of climate change. This includes biodiversity loss, increased frequency of natural disasters and food and water shortages.
Based on the estimated remaining green-house gas emission quotas consistent with the temperature limit, starting mitigation in 2020 would still require aggressive annual emission reductions of about 6% per year.
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With the nature of ESG being a long-term secular trend, it is imperative that investors adopt a longer-term horizon, understanding that this is a journey that will take time, especially in Asia where this is relatively nascent, also for the fact that it is still an economically growing region.
To highlight, ESG’s benefits are equally rewarding in the long term — they are structural and serve as portfolio insurance against potential E, S, and G risks, which may impact performance. For example, less environmentally friendly companies may be subject to greater regulatory risk, including higher taxes and fees imposed on emissions. Companies that fail to ensure workplace safety and data security are also prone to the effects of social risks.
Being awarded Best Bank for ESG in Singapore, DBS strongly believes in taking a long-term approach to investing. Investors are advised to avoid timing the market and instead, stay invested in diversified portfolios including secular trends such as sustainability.
Achieving sustainable returns
Contrary to popular belief, ESG investing does not mean sacrificing returns. Instead, ESG investing focuses on both achieving financial outperformance over the long-term while also generating sustainable returns.
ESG investing provides a framework to quantify the intangible costs of generating growth that may not always surface in accounting entries as dollars and cents. It can be observed as an overlay which builds on returns for the average investor.
The ESG overlay has also been successful in sector allocation, being overweight in outperforming sectors such as Information Technology, while simultaneously underweight in underperforming sectors such as energy.
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In Asia, the adoption of ESG has been slower compared to the Western regions, partly due to a greater emphasis being placed on economic development. For instance, the MSCI World Index has 5.5% in laggards of B and CCC rating, compared to the MSCI All Country Asia ex-Japan has 13.5% in laggards of B and CCC rating.
However, the region has been playing catch up over recent years, a trend slated to persist as consciousness of sustainability issues take root across the stakeholder spectrum.
Asia’s ESG wave is poised to flourish over time as consumers have more sustainability expectations and companies are increasingly conscious of their positive role in society. As found in the MSCI 2021 Global Institutional Survey, 57% of Asia Pacific investors expect to “completely” or “to a large extent” incorporate ESG issues into their investment analysts and decision making processes by end-2021.
Weaving ESG into the investment process
There are a few ways one could start making ESG investments. In Asia, this typically comes in the form of ESG-thematic products such as thematic mutual funds and exchange traded funds (ETFs).
However, there needs to be caution against such products that are overly niche or narrow in scope, as they may not provide adequate opportunities for active management against a relevant benchmark. There is also the concern about the “green-washing" problem, where products are promoted as ESG-friendly, but are not true to label.
There is also an increase in ETFs and mutual funds that integrate ESG criterion into their investment process. These ESG-integrated products are closely aligned with DBS’s approach, as the bank believes that ESG investments are more than just thematic products and the essence of ESG lies in integrating it in one’s investment decisions.
For example, DBS Treasures Private Clients are offered a carefully curated selection of both ESG-thematic and ESG-integrated ETFs and funds, on top of the option to invest in ESG-related stocks, bonds, structured products, and private equity.
With the belief in including ESG as an investment criterion, DBS has also weaved ESG into its investment process integrating MSCI ESG ratings into its wealth product suite in 2019, providing transparency over the ESG ratings and characteristics of all its product offerings.
DBS also proactively reaches out to its clients to assess the ESG rating of their individual investment holdings and overall portfolios — rebalancing and switching out poorly rated investments for better-rated alternatives, where possible.
The ultimate objective is to allow Treasures Private Clients to maximise their ESG impact through investments, the business they operate, as well as their philanthropic or social impact efforts.
The time is now
As the planet continues to degrade due to grave environmental and sustainability challenges, it is crucial that individuals start playing their part in tackling the issues, be it via ESG investing or other changes that could provide a positive impact.
Start investing sustainably with DBS Treasures Private Client. Simply indicate your interest here and a Relationship Manager will be in touch with you soon.
