Getting Started in ESG InvestingDecember 6, 2019
Doing good with my hard earned money
As a parent, my biggest wish is for my children to be responsible with their money. This is why I gave them 3 piggy banks; for long-term and short-term savings as well as for donations or giving.
Singapore was built on the philanthropy and kindness of Singaporean businessmen such as Lee Kong Chian, Lien Ying Chow, Khoo Teck Puat, Goh Cheng Liang. Their contributions and support in several areas shaped our society.
Figure 1: Mr. Goh Cheng Liang (Resource from AsiaOne)1
We work hard to secure a better future for our children and ourselves. Hence, we should set a good example and be responsible when handling our finances.
What is ESG Investing?
Environmental, Social and Governance (ESG) Investing involves investing in companies that support environmental protection, social justice, ethical management practices, alongside traditional fundamental factors.2
Figure 2: Resource from CFA Institute
How much money is invested in ESG?
It was reported in US Sustainable, Responsible and Impact Investing Trends that $12.0 trillion in total assets under management (AUM) was allocated for the use of at least one sustainable, responsible and impact investing strategy.3 ESG-themed ETF fund assets more than doubled from $3.5 billion to $7.4 billion, and the number of funds increased 176 percent from 25 to 69.
Sustainable, Responsible and Impact Investment (SRI) mutual fund assets have increased 34 percent since 2016 from $1.72 trillion to $2.58 trillion, while the total number of SRI mutual funds has increased 50 percent from 475 to 636.4
Figure 3: Resource from US SIF Foundation
How can I start with my own personal portfolio?
1. Reflect on your values
Different investors hold different attitudes towards the value of their investments. While some consider the economic value of ESG ETFs, i.e. the opportunities and risks of its future returns, others might take moral values into consideration. Most investors seek to maximise their economic value, but some may consider if the companies they invest in have environmental protection, social justice, ethical management, e.g. a coffee or fashion business that practise fair trade and responsible production.
2. Familiarise yourself with the ESG investing methodologies
There are plenty of strategies in ESG investing; at least six methodologies are introduced by the CFA Institute. The most popular way to evaluate your investment is exclusionary screening/negative screening. You can either eliminate a certain product, service or exclude the whole company and the entire sectors based on your moral values: weapons, alcohol, tobacco, energy and etc.
Figure 4: Factors considered by MSCI Screening Research5
3. Identify the investments
You can refer to the sustainability section of a company’s reports (strategic report, sustainability report or annual report) which allows you to evaluate their performance on ESG integration.
Figure 5: Extract from: Singtel’s 2019 Sustainability Report
ESG fund is an option if you are looking for hassle-free investments. You can do your part by sharing your needs and preferences with your financial institution so that its Fund Managers can produce the funds with your investment objectives in mind.
One example is the First State Dividend Advantage Fund: Click here for more information about this Fund.
c. ESG ETFs
— Use POEMS ESG ETF Screener
You can use POEMS ETF Screener by applying “ETF” filter.
Figure 6: POEMS ETF Screener with “ESG” filter applied and showing descending order by AUM
Figure 7: POEMS ETF Screener’s Sectors Filter
You can also filter the funds according to your preferred sectors.
— Analyse ESG ETFs
According to CFA Institute’s guide Environmental, Social, and Governance Issues in Investing, A Guide for Investment Professionals, there are six methods of analysing ESG ETFs. The most popular method of evaluation is exclusionary/negative screening, which avoids securities of companies or countries on the basis of traditional moral values (e.g., products or services involving alcohol, tobacco, or gambling) and standards and norms (e.g., those pertaining to human rights and environmental protection).6
Studies has proven ESG Investing to be a good investment strategy
In the research study “ESG and financial performance: aggregated evidence from more than 2000 empirical studies”, 2100 out of more than 3700 empiric studies showed a positive relationship between Corporate Financial Performance (CFP) and ESG Investing. (Gunnar Friede, 2015)
Figure 8: Clean Energy is an example of environmental criteria in the ESG theme
The War wages on – We need your help
While ESG investing is becoming more common, encouraging responsibility and awareness of ESG standards among companies remains a challenge.
Sustainalytics, a company focusing on ESG and Corporate Governance research and ratings, reported that the number of company activities that generate undesirable social or environmental effects grew from 6,400 in 2014 to over 13,000 in 2016. These activities are dominated by Quality and Safety and Business Ethics, which together account for 30% of all incidents.7
Hence, we urge you to consider the sustainability and societal impact of your investments.
Figure 9: Incidents by year and ESG theme from Sustainalytics
About the author
As the Managing Director of Phillip Securities Pte Ltd (PSPL), Luke oversees PSPL's daily operational businesses, strategic directions and executes management decisions for performance-driven results in consultation with the board of directors. He honed his management leadership style having been responsible for various roles in the PhillipCapital Group of companies since 2004. His experience covers research solutions, overall strategy and business development. He co-founded POEMS Venture, one of the venture capital arm of PhillipCapital which invests in companies such as start-ups with valuable guidance accumulated from years of experiences in the finance industry and running POEMS, one of the earliest FINTECH launching online trading. Luke also formed and chaired various Industry Workgroups and led discussions with regulators on issues impacting SAS members. Luke graduated from Imperial College London with a Bachelor of Electrical and Electronic of Engineering and obtained a Master's degree in Business Administration from Nanyang Technological University.