Sustainable investing – what is it and why investing is not always only about the money
Sustainable or social, responsible, impact investing – SRI. This concept began in the 1960s when American youths started boycotting companies that supplied weapons for the Vietnam War.
Since then, it has been broadened to include other environmental, social, and governance (ESG) factors, which are used to screen stocks for socially conscious investors.
These days, sustainable investing has gained mainstream popularity, thanks to millennials, millionaires, and those who believe in it. This major trend is now shaping companies' business practices, products, and profitability, and more firms are being pressured to do good in order to make good money.
Here are three ways that the sustainable investing movement can benefit your business, while you do good to benefit the world:
Meeting ESG standards helps attract customers and shareholders
The sustainable investing boom is driven by the young, or humanity's next generation who will inherit the world and its problems, and the well-off.
In particular, millennials are twice as likely as the overall investor population to invest in firms targeting social or environmental goals, says Morgan Stanley's Institute for Sustainable Investing.
Poised to receive over US$30 trillion of inheritable wealth according to Ernst & Young, millennials represent a lucrative customer segment and a powerful shareholder base for businesses.
Their spending and investment decisions will inevitably put pressure on even more companies to meet ESG standards.
The good news is that while it takes more effort for your company to meet ESG standards, this could very well attract more big-money investors for you. Total assets in ESG-dedicated funds in Europe and the United States have surged nearly 50 percent from 2013 to 2017, according to Cerulli Associates.
A strong ESG focus can grow value for your business over time
Doubts linger among many companies, particularly in Asia, about whether it really pays off to meet ESG standards.
After all, you may not see much short-term benefits from adopting practices such as producing eco-friendly products using higher-cost recyclable materials
But financial institutions like Blackrock claimed in 2018 that there is "early evidence that a strong ESG focus may be linked to equity outperformance over time", citing a study it conducted on the annualised total returns of ESG indexes since 2012 compared to the standard index.
What's more, over 90 per cent of portfolios with a sustainable investment concept posted similar or better returns than a normal investment portfolio, a 2015 paper published in the Journal of Sustainable Finance & Investment noted.
This proves that well-run companies that meet high ESG standards – even if doing so incurs higher costs – can still reap better profits.
Early-mover advantage as Asia takes off
In Asia, sustainable investing is finally gaining traction after years of scepticism and a lack of government initiatives.
The Asia ex-Japan region used to lag behind other developed markets, with less than 1 percent of the region's assets going to sustainable investments in 2017, according to a McKinsey & Co study.
But now there is a surge in interest and inflows into sustainable investing in Asia, a 2018 Standard Chartered Private Bank survey found. The mainland Chinese are "leading the way with an expected allocation of 23 per cent (of their portfolio to sustainable investments) by 2021". This compares with 19 percent for Asian investors as a whole, according to Standard Chartered Private Bank, which polled about 400 investors with at least US$1 million in investments.
Meanwhile, a new wave of government initiatives is pushing Asia in making a more attractive market for ESG-compliant firms. For instance, Asian government pension funds, such as Japan's US$1.3 trillion Government Pension Investment Fund (GPIF), have poured billions of dollars into ESG strategies.
The GPIF signed up in September 2015 for the Principles for Responsible Investing (PRI), developed by an international group of institutional investors in partnership with the United Nations. There were over 2,000 PRI signatories from more than 50 countries managing over US$80 trillion in assets as of October 2018, reflecting the global trend among funds taking action to commit to ESG principles.
Some Asian companies like agri-business firm Olam and garment maker TAL Group are already testifying to the benefits they reap from adopting ESG practices. One key advantage, they told a CNBC's Sustainable Entrepreneurship conference in March 2019, is a more productive workforce. As more Asian workers also buy into sustainable practices, these firms found that their sustainable corporate values have won employees' hearts and minds, translating into better productivity and retention.
There is still time and ample opportunities to grab the early-mover advantage in Asia. Just don't wait too long to save the world – chances are, the SRI scene here is going to get crowded pretty soon.
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