Have you heard of sustainable investing? What about ESG investing? I bet you have! They are the trending words in recent years in investing since more investors like you and me are looking for ways to make a positive impact on the world with our capital.
Before we jump on the bandwagon, we will show you why it’s time to catch up with the sustainable trend and what you should know about the next 20-year trend.
Sustainable Investing: What Is It?
First of all, let’s get to know what sustainable investing is. Sustainable investing, by definition, incorporates three factors: environmental, social, and governance.
Environmental Factor focuses on nature conservation, including climate change and carbon emissions, air and water pollution, etc.
Social Factor focuses on people and culture. It includes customer satisfaction, data protection and privacy, community relations, and more.
Governance Factor focuses on company management standards, such as board composition, audit committee structure, etc.
ESG-listed companies will put these factors into the decision-making process to put them into practice and try to do their best to make a positive impact.
Reasons to Invest in Sustainability
As a MoneySmart investor, we know you may ask for reasons why you should consider a sustainable investment. Of course, risk and rewards are always present. Here are the reasons how sustainability may affect the risk and rewards of your portfolio, and you’re welcome!
ESG Funds Market Is Estimated to Grow
J.P. Morgan Asset Management reported that over $500 billion flowed into ESG funds in 2021, a 55% growth in assets under management. The ESG funds market is estimated to grow to $30 trillion by 2030. An opportunity has been spotted for potential market growth in the future!
ESG Funds Have a Lower Volatility
Why ESG Funds? Because it’s less volatile. According to Morningstar, 77% of ESG funds have existed for ten years, compared with 46% of traditional funds. In short, they don’t die out easily.
Non-ESG Businesses Face Increasing Risks
ESG is the new game rule for the next decade. Non-ESG businesses’ returns can be greatly affected by climate change, investors’ pressure, and governmental regulations, which threaten the business’s long-term value.
Environmental changes such as climate crises are causing physical damage to a company’s operation, like tsunamis, tornado are becoming more frequent!
Divestiture from investors becomes bigger. 2021 PwC Reports show that 49% of investors will devest if the company is not active enough in taking ESG initiatives. (Yeah, I know, the sustainable trend is big to ignore pressure from investors!)
Governmental regulations are something that we can’t forget, such as proposals on carbon emission caps for companies. They may terminate the business.
Sustainability Investment: Themes in the Next 20 Years
What are the urgent problems the human race may face in the next 20 years? Climate, energy, food, and cybersecurity are the top four concerns, and these are the investment themes to focus on.
Climate-related Theme
Net Zero 2050 is a global zero-carbon emission target that every country strives to achieve before 2050. It is a hot topic in sustainable investing because of its urgency for change against the more frequent and severe climate events.
What’s more, about Net-zero Target is that it’s no longer a promise but an ongoing revolution in the 21st century. Corporations are demanded to put their net-zero plans into practice rather than paying lip service. The following 20 years will be the game for companies to adapt to win or stay status quo to lose.
Carbon Offsetting and carbon pricing are on the rise. Institutions and individuals can compensate for their carbon emissions by purchasing carbon credits. The money you have purchased for carbon credits will be allocated to support carbon-offsetting activities.
In September 2022, Hong Kong Exchanges and Clearing (HKEX) is reported to set up a voluntary carbon credits trading platform shortly. It can facilitate partnerships to join the international carbon market. This can be a game changer for industries that can afford to pay for the carbon credits.
Energy-related Theme
Energy Transition is another focus of the coming decades because Ukraine-Russian War has threatened the stability of the energy supply in the Euro Zero. Energy resilience gains more importance as a factor in a sustainable portfolio to defy the energy transition in the Euro Zone.
Food-related Theme
Food Sustainability has gained importance because food supply has become a concern in 2022 owing to the international sanctions on Russia and the supply chain being disrupted by the Russian-Ukraine war. We may consider how to diversify the risk of relying on conventional sources of food supplies.
Cybersecurity-related Theme
Cybersecurity is getting more attention with the advancement of technology. As more data is collected nowadays, it’s crucial to ensure the information is well-managed from a personal, company, and even national aspects.
According to UBS, cybersecurity-related stocks outperformed in 2022, and they will continue their momentum due to the concern of the digital war after the Russian-Ukraine war. As more data is collected, it’s crucial to ensure the information is well-managed from personal, company, and even national aspects.
Sustainable Investment: Hong Kong Government Attitude
The government plays a major role in developing sustainability investing, especially in forming policies, ESG data disclosure standards, and giving resources to attract talent.
The Hong Kong government is doing its job in supporting sustainable investing. Here are the recent initiatives:
- Launch Sustainable & Green Exchange (STAGE) in 2020
- Set up of Securities & Futures Commission (SFC) guidelines for ESG funds in 2021
- The Government Green Bond Programme
- Research on the feasibility of setting up a carbon market in Hong Kong.
- A total of US$1.3 million fund will be allocated to attract fintech start-ups from Sept 2022.
That shows the Hong Kong government has a supportive attitude toward sustainable investment. It can be a good sign for developing ESG investing funds.
Sustainable Investing: What Are the Restrictions?
ESG investing is still in its early stage. The regulations are not fast enough to follow the latest financial products in sustainable investing. Greenwashing and unstandardized ESG metrics are the biggest restrictions in ESG investing.
Greenwashing Can Be A Problem
“Greenwashing” happens when a company markets itself or its products as environmentally friendly and conceals the actual environmental impact.
As stated by InfluencerMap, among the 130 climate-themed funds, 72 of them have negative Paris Alignment scores, meaning almost 55% of the total failed to be consistent with the international treaty in production.
That said, even if categorized as “Green” or “Sustainable,” a fund might still falsify its actual impact on the environment without credible auditing.
ESG Metrics Have Yet to Be Unstandardized
Remember that ESG metrics have yet had a universally accepted global set of principles and guidelines! Over 100 organizations produce sustainability ratings in the market. Here are some of the standards:
- Sustainalytics
- MSCI
- FTSE
- Bloomberg
- Thomson Reuters
- Vigeo Eiris
Approaches to calculating or presenting ESG metrics vary from company to company, creating a barrier for us to make comparisons among investment options, but this is expected to change with government regulations on ESG audits in the future.
Is Investing in ESG Funds Profitable? Listen to The Experts!
Of course, we want to make a better world with our investments, but who doesn’t wish for better returns? Let’s check the studies of ESG funds’ returns conducted by different leading financial institutions:
According to Vanguard Funds, “ESG funds have neither systematically higher nor systematically lower raw returns or risk than the broader market.”
While Morgan Stanley’s study states: “sustainable equity funds” outperformed traditional funds by 4.3% in 2020.
As reported by Reuters, ESG funds dropped 9.2% in January 2022, compared to a 5.3% drop in the S&P500. It’s mainly because of the decline in the technology sector.
In short, ESG investing has a mixed results of profitable returns for now. But the returns are expected to rise with the market in the future.
What Are The ESG Funds Available In Hong Kong?
There are 121 SFC-authorised ESG funds available in Hong Kong, with a total Assets Under Management (AUM) of $142.7 billion.
Here are a few examples:
- BNP Paribas Funds Green Tigers
- Fidelity Funds – Sustainable Eurozone Equity Fund
- Invesco Sustainable Global Structured Equity Fund
- HSBC Global Investment Funds – Global Lower Carbon Equity
Interested in investing in ESG funds? Remember to consult your professional financial advisor.
Also, be aware that some “green funds” might not be doing what you expect – hiding their activities from nature. So, remember to research to ascertain what’s behind the curtain to avoid “greenwashing funds.”
Final Words: Sustainable Investing Will Be Around
Sustainable investing will be a trending topic in the next 20 years. With more resources provided by the Hong Kong government and the global trend of ESG-integrated investing, we can expect positive growth in the ESG portfolio and a positive impact on our beloved Earth.
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