What is sustainable investing?
You can invest in the greater good of our planet and its people without sacrificing your bottom line. An investment's ESG rating will tell you how it holds up from an Environmental, Social and Governance standpoint.
What do ESG ratings measure?
ENVIRONMENTAL
This looks at how companies manage their impact on the environment, including:
- greenhouse gas emissions
- resource depletion
- water usage
- waste and pollution
SOCIAL
This rates how companies manage relationships with their employees, clients and communities, including their:
- regard for human rights
- development and treatment of staff
- oversight of supply chain
- health and safety
GOVERNANCE
Watches how companies are governed or managed, and looks at things like:
- executive pay
- business ethics and culture
- diversity and structure of board
- regard for shareholder rights
Source: The Hongkong and Shanghai Banking Corporation Limited, Sustainable investments: Introductory guide, 2020.
Why is ESG investing or sustainable investing becoming more popular?
Consumer-driven change
As people become more concerned with things like climate change and human rights, they have started to change their consumption patterns. This might start with something as simple as buying fair trade coffee or organic cotton, but many people carry this mindset into their investment strategy, adapting their portfolios to reflect sustainable or ESG investing.
This puts a focus on long-term value creation and preservation by investing in companies that embrace the ideologies needed to build a sustainable future. Integrating ESG issues into investment decisions can help manage risks and deliver long-term capital growth.1
Companies have their own reasons for embracing sustainability as part of their business culture, and not just because it's good for the planet: companies are more likely to deliver the returns investors seek, and succeed in the long-term, if they that can create value for all of their stakeholders.2 In fact, studies have shown that companies with better ESG ratings are more likely to show high profitability as well.
3 reasons to consider ESG factors when choosing your investments
2They help you mitigate risk
ESG issues can play a huge role in financial results and can impact share prices. For example, climate change presents the risk of damaged assets, changing regulations and more frequent catastrophic events. Organisations concerned with ESG metrics will factor these risks into their business model.
2They can enhance your potential returns
Companies with strong ESG metrics are more likely to outperform. Companies that address, combat and develop solutions to ESG have proven to be sources of "alpha" – returns that are higher than the market return.
2They can help your portfolio stay current
Firms that can adapt to changing consumer needs and regulatory requirements are more likely to succeed. Seventy-seven countries have committed to net zero carbon emissions by 2050 at the Climate Summit. Companies that show concern for ESG guidelines are better able to adapt to the new regulations on the horizon.
How has COVID-19 affected sustainable investing?2
| COVID-19 vs ESG | Environmental | Social | Governance |
|---|---|---|---|
| Positive (+) |
Less air travel has led to significant reductions in greenhouse emissions.
More remote meetings and conferences have removed the need to travel, which reduces our carbon footprint. |
More focus on healthcare systems as the health impacts of COVID-19 highlights the vulnerabilities of global health systems.
Rethink of how gig economy workers are paid so contractors and casual workers are more fairly treated. |
Shift to more proxy voting at AGMs as large gathering are discouraged across many countries. |
| Mixed (≠) |
Working from home reduces commuting, thus lowering emissions and pollution but is offset by increased energy usage at home.
More online delivery reduces personal shopping trips and mass movement but increases the use of packaging material.
Lower emissions from reduced industrial output are likely temporary and will rise again when factories ramp up and energy demands grow. |
Social inequality may increase in the near term with flexible work arrangements showing a gap in the ability to do so between the educated and less-educated workforce but may drive improved digital access for all over time.
Stockpiling forces alternative sourcing as panic buying drives price inflation, scarcity and counterfeits but may also induce alternative supply chain sourcing which benefits more local producers. |
Rise in asset impairments and write downs could have both positive and negative impact on results, performance and future earnings. |
| Negative (-) |
Increase in disposable food packaging usage could contribute to more waste that will end up in landfill. |
More people may fall back into poverty as low-income households are likely to be disproportionately impacted by the burden of COVID-19. |
Travel restrictions could impact audits leading to incomplete reports or late filings that could impact compliance and add additional uncertainty to markets. |
| COVID-19 vs ESG |
Positive (+) |
|---|---|
| Environmental |
Less air travel has led to significant reductions in greenhouse emissions.
More remote meetings and conferences have removed the need to travel, which reduces our carbon footprint. |
| Social |
More focus on healthcare systems as the health impacts of COVID-19 highlights the vulnerabilities of global health systems.
Rethink of how gig economy workers are paid so contractors and casual workers are more fairly treated. |
| Governance |
Shift to more proxy voting at AGMs as large gathering are discouraged across many countries. |
| COVID-19 vs ESG |
Mixed (≠) |
| Environmental |
Working from home reduces commuting, thus lowering emissions and pollution but is offset by increased energy usage at home.
More online delivery reduces personal shopping trips and mass movement but increases the use of packaging material.
Lower emissions from reduced industrial output are likely temporary and will rise again when factories ramp up and energy demands grow. |
| Social |
Social inequality may increase in the near term with flexible work arrangements showing a gap in the ability to do so between the educated and less-educated workforce but may drive improved digital access for all over time.
Stockpiling forces alternative sourcing as panic buying drives price inflation, scarcity and counterfeits but may also induce alternative supply chain sourcing which benefits more local producers. |
| Governance |
Rise in asset impairments and write downs could have both positive and negative impact on results, performance and future earnings. |
| COVID-19 vs ESG |
Negative (-) |
| Environmental |
Increase in disposable food packaging usage could contribute to more waste that will end up in landfill. |
| Social |
More people may fall back into poverty as low-income households are likely to be disproportionately impacted by the burden of COVID-19. |
| Governance |
Travel restrictions could impact audits leading to incomplete reports or late filings that could impact compliance and add additional uncertainty to markets. |
While the immediate focus for many investors may be on market volatility, COVID-19 strengthened the strategic importance of sustainable investments in preserving and creating long-term value. ESG investment products received record inflows amidst COVID-19: net inflows into ESG Exchange-Traded Funds in the first two months of 2020 reached USD14.3 billion, far higher than the USD2.4 billion invested in the same period in 2019.3
And for those still uncertain about the value of ESG: the MSCI World ESG index outperformed the parent benchmark MSCI ACWI by 1.5% YTD as of 10 April 2020.3
How will recent market volatility change the outlook for ESG investing?
Based on how ESG investments have performed in recent months, here are some possible changes we can expect to see.
- ESG will focus on energy transition towards low carbon economy and alignment with UN sustainability development goals.3
ESG strategies, which hold underweight exposures in the energy sector and overweight exposures in healthcare and technology, have outperformed the wider market in recent market volatility.3 - ESG funds will be more likely to exclude companies that don't have transparent supply chains.3
This enables investment managers to better identify risks and screen out companies vulnerable to energy transition. It's also easier to spot where there will be breakdowns in the manufacturing process and flow of products - disruptions that have been brought to light by the current crisis.3
To find out more about ESG investing and how you could make it part of your larger investment strategy, speak to your Relationship Manager today.
Sources:
1The Hongkong and Shanghai Banking Corporation Limited, Sustainable investments: Introductory guide, 2020.
2The Hongkong and Shanghai Banking Corporation Limited, #WhyESGMatters: COVID-19's effect on ESG issues, 30 April 2020.
3HSBC, Sustainable Investments Product Ideas Booklet, April 2020.