ESG investing: Don’t throw the baby out with the bathwater

While some argue that ESG investing is nothing but marketing spin, investors should double down on research and demand accountability to drive the broad adoption of global standards, argues Samuel Rhee.

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Numerous studies have illustrated that environmental, social and governance-based investments have outperformed in recent years and resulted in increased demand that will keep growing. Image: Wolf Craft, CC0

These days it is almost customary to call out Environmental, Social and Governance (ESG) investing for being nothing but marketing spin, merely disingenuous promises by the investing community to pull in funds – essentially misrepresentation, even greenwashing. 

The absence of a rigorous, globally accepted ESG framework has seen several reports accusing companies of making false claims about the sustainability of their products and actual real-world impact, all focused on making money off of a popular trend. 

But I believe the everyday investor should continue to channel money into ESG-focused funds—it is perhaps critical to the investment landscape and even the world we live in.

Landscape of hope, not gloom 

Despite critical concerns that have been highlighted by various segments from within and outside the finance industry, ESG investing continues to grow.

Numerous studies have illustrated that environmental, social and governance-based investments have outperformed in recent years and resulted in increased demand that will keep growing. As reported by Bloomberg, Global ESG assets are on track to exceed $53 trillion by 2025, representing more than a third of the $140.5 trillion in projected total assets under management.

While environmental factors have long been in the spotlight, this growing demand has seen issues previously not accorded attention—perhaps best illustrated in the “S” issues that include gender and diversity and labour standards that are now recognised as meaningful considerations in investment decisions.

Yes, there are various ESG scores, ratings, and frameworks to evaluate investment products, but these methodologies are not consistent. Companies can claim to be doing good but rather than taking meaningful action against climate change or other social causes, there have been reports of false claims.

Different reporting metrics and disclosure standards from ESG-setters, such as the Sustainability Accounting Standards Board (SASB) and the Global Reporting Initiative (GRI), have perhaps created unintended confusion in the marketplace.

This confusion is also reflected in the Singapore investor.

In a recent Endowus survey of over 1,100 participants in Singapore, results indicated that while ESG investing resonates with over 93 per cent of respondents, only 28 per cent currently hold any ESG investments. Furthermore, the survey indicated that a majority (59 per cent) of respondents cite the possibility of greenwashing as a key concern in adopting ESG investment products.

But it is precisely because of this growing demand for ESG – a demand matched by funds – that action is already being taken to address these concerns, and why I believe continued investment from the everyday investor can help accelerate the process.

Concerns are being addressed

To combat the numerous concerns that are faced by investors, it is essential that companies trawl through and analyse ESG products, assess ESG frameworks, as well as ensure the credibility of partners they bring on board. Fund managers and advisors are already doing this to ensure that their clients are protected from products that are offered on their platforms.

It is critically important that due diligence is undertaken. It is essential for companies to make independent and unbiased assessments of the universe of funds available before selecting them. Just because a fund or ETF has “ESG” or “impact” in its name does not mean it is actually changing the way companies do business more sustainably. Just because a company makes electric vehicles does not mean it aligns with ESG principles. An added layer to ensure due diligence is to dig deeper into the historical performance of the fund.

Global networks such as the UN-backed Principles for Responsible Investment, which launched a three-year strategy that aims to raise the bar for signatories as the UN steps up its drive to develop a sustainable global financial system, is gaining traction and getting more signatories on board to raise the bar for financial policy and regulation, globally. 

There are still gaps

The first step to change is awareness. As investors, we shouldn’t shun away from ESG conversations just because they are unwieldy. By the same token, we shouldn’t shy away from ESG investing even if the ecosystem appears imperfect.

Investors need to take the step of finding out more about the costs involved for ESG investments. It is essential to take the time to read up on the company that you choose to invest in, and also find out their historical performance to give yourself an informed choice on which funds are best to invest in.

At the same time, investors should also assess your ESG investments as part of your overall investment portfolio to ensure your financial portfolio is well diversified. With all forms of investing, it helps to have a trusted advisor conduct the necessary analysis to build you a portfolio that is suited to your specific needs.

This holds just as true for sustainable investing, perhaps even more so, given the additional complexity of ESG analysis. While greenwashing may be an industry challenge for the foreseeable future, it can be mitigated through partnering with the right advisor.

Every dollar can help drive change

Even though the demand for ESG investing has increased and the effect seems like a subtle shift, the results of our investments in ESG funds will inevitably bring about change. To accelerate, it is essential for us to challenge financial institutions on their ESG compliant practices.

The high demands for ESG products will also continue to drive change in companies. Apart from investment gains, an ESG driven company will overall deliver positive outcomes for both employees and customers. Companies that take steps to improve labour conditions, enhance the diversity of their teams, give back to their communities, and take a stand on sustainable environmental policies combine to strengthen the company’s brand. As millennials, in particular, become employees, consumers, and investors, they pay higher regard to good corporate actors and reward them with loyalty.

The popularity of ESG has also driven governments around the globe to look into sustainable initiatives. For example, Singapore recently launched a Green Plan 2030, where sustainable living, energy reset and the green economy are seen as integral pillars to its economic growth and climate and resource resilience. In Hong Kong, as part of its commitment to sustainability, HKEX has launched its Sustainable and Green Exchange (STAGE), an online portal to provide information transparency on sustainable, green, and social investment products.

The more investors demand accountability, and actively challenge advisors and companies, the more likely we’re able to impact ESG changes in corporations, as well as drive the broad adoption of global standards.

This means we can influence companies to reduce their carbon emissions, enhance their labour protection and employees’ rights, or ensure that their board members act in the best interest of their stakeholders.

Your investment dollar can influence change, even if the industry appears unwieldy and imperfect—indeed, it appears that you must not throw the baby out with the bathwater. 

Samuel Rhee is Chief Investment Officer for Endowus, a cutting-edge digital wealth platform based in Singapore.

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