(Aug 23): To the alarmist, the future is bleak. The water crisis in Chennai, India left hundreds dead as the temperature reached 50 degrees Celsius in some areas while reservoirs that supply the city’s drinking water completely dried up. This is only the latest in a series of climate catastrophes this year, from more intense wildfires to frequent high-tide floodings. The harsh truth is - as most major reports have suggested - the world is well on its way to raise average surface temperatures and we are most unlikely to reach “net-zero” emissions by 2050.
But to the investor, the current predicament is also an opportunity to ride a bull market for the coming two, three decades, according to UBS analyst Sam Arie. Specifically, this is the start of a sustained growth for renewable energy solutions, and for more radical and sustained efforts to reshape industries. This shift will be as significant as the transformation of the internet at the end of the 20th century. And investors are paying attention: the world’s biggest provider of mutual funds Vanguard boldly declared sustainable ETF fund assets will grow from US$25 billion now to over US$400 billion in a decade, a demand particularly fuelled by younger investors.
As more investors pay attention to sustainable investing, Singapore and its capital markets stand to gain. In Singapore, the government and businesses are already taking cues from this global movement. The Republic introduced a carbon tax this year; the Singapore Exchange launched four equity indices based on sustainability factors. The indices use assessment of environmental, social and governance (ESG) criteria by Sustainalytics. The SGX has also mandated last year that all listed companies have to report their ESG practices.
Local financial institutions have also joined the chorus of global banks to offer companies incentives to do good, partly under pressure from investors who want more accountability with their money.
In the last two years, the value of sustainability-linked loans dished out by banks rose over seven times to reach US$36.4 billion, according to BloombergNEF’s research. ESG lending accounted for 15% of global sustainability debt last year.
The Monetary Authority of Singapore has said that the city-state wants to position itself as a hub to finance sustainable projects in the region. As cities in Southeast Asia are expected to undergo rapid urbanisation, there is both a growing awareness, and demand. The central bank reportedly said it will enhance the role of capital markets to support the region’s infrastructure development to transition into a low carbon model. After all, the role of a regional financial hub is one familiar to Singapore.
ESG interest, however, until recently has been in the realm of institutional investors and high-net-worth individuals. It is undoubtedly true that interest in sustainability
has not taken off in a big way in the retail market. But the sector is slowly moving in that direction globally. Leading names such as Standard Life Aberdeen, Columbia Threadneedle Investments and Alliance-Bernstein Holding have come together with The Big Issue, a magazine sold by homeless people, to build a platform to offer sustainable funds to retail investors.
Meanwhile, active managers are today increasingly paying attention to ESG factors, partly under pressure by investors to mitigate climate risk in investment portfolios. A study in 2015 by the Economist Intelligence Unit estimated that investors stood to lose between US$7.2 trillion and US$13.8 trillion from now to the end of the century if global temperatures rise by five degrees Celsius to six degrees Celsius. This could be in the form of physical asset losses and weaker asset growth and lower returns across all sectors. Institutional investors, pension funds and sovereign funds have put increasing pressure on money managers to mitigate such risks in the companies they invest in, or risk losing investors’ support. For instance, Swedish public pension fund AP4 pulled out 150 carbon emitters in the standard and Poor’s 500 index and promptly diversified its holdings in them.
And given Singapore’s position and already established financial infrastructure for sustainable financing, it is plausible for the country’s stock exchange to take a leadership position in sustainable investing to capture the global funds looking to invest sustainably.
To be clear, Singapore’s ESG universe is still nascent. The EPFR Global, which tracks global investments in ESG assets only tracks one fund in Singapore with US$11 million in assets. But as regulators around Asia turn up the heat and introduce new regulations against fossil fuels and other polluting activities, it would come as no surprise that investors would want to seek ways to protect their assets from becoming stranded. This is particularly pertinent in Southeast Asia where domestic politics and a lack of strong environmental regulations increase risks for investors. Indeed, these are areas where sustainable investing can offer some relative safeguards.
More than 2,000 studies have drawn links between ESG and resilient financial returns. According to a study by Friede, Busch & Bassen in 2015, most studies have found that ESG had a positive or neutral effect on financial returns. By putting in place the right mechanism to hold companies to high standards of ESG criteria, the exchange could not only boost investors’ confidence and capture global funds interested in sustainable financing, but help the overall financial market mitigate risks.
The field of sustainable investing is at best at its infancy. There is a lot more that can be done. There is currently no widely acknowledged benchmark to gauge companies’ ESG performance. Unlike measuring investment returns, doing good means different things to different people.
Through interviews conducted by The Edge Singapore, most money managers say they do not track the actual impact of their investments on society. One fund manager says the fund would virtually make a loss if it does so. In the area of sustainability-linked debt, studies also found that there are worrying concern whether these loans that depend on third-party ESG metrics and ratings do not reflect actual efforts to improve environmental or social causes but are only reflective of companies ability to comply with reporting requirements. This is because companies that comply with reporting requirements are better rated, according to the American Council for Capital Formation. Among money managers, there is still no consensus or proven methods to measure climate risks.
All these challenges are in fact opportunities for Singapore, and SGX. Simon Karaban of the SGX recently said that data could help hold companies responsible for their actions, in particular, fact-checking their claims against sustainability goals. By developing methodologies and standards around sustainability practices, SGX can show itself to be a leader in this field that can be emulated by other financial markets. If implemented well, to the Singapore investor, to SGX, the future is not that bleak -- certainly not for the next two decades.
This story won the #SGX20 award, a special category to mark the 20th anniversary of SGX’s formation in 1999, at the 2019 SGX Orb Awards
