What is ESG and does investing responsibly support long term returns

Many companies use environmental, social and governance (ESG) criteria to ensure they are running themselves responsibly. Fund managers use ESG considerations to identify risks and opportunities that could affect a firm’s long-term sustainability.

A responsible investing strategy seeks to invest in companies that align behind ESG principles and engage with others to improve their behaviour.

Environmental, Social and Governance

  • Environmental criteria show how companies interact with the planet, including issues such as carbon emissions, recycling and plastic use.
  • Social criteria look at how they manage relationships with employees, suppliers, customers and communities – for example, over issues such as worker rights and inclusion.
  • Corporate governance concerns leadership issues, such as executive pay, internal controls and shareholder rights.

Generally, a company could be considered a responsible business by, for example, having credible net-zero carbon-emissions plans, looking after its employees and supply chains, and having sound management practices.

But a challenge for companies and investors is that – because data is currently patchy, albeit improving – it is difficult to define an objectively ‘good’ ESG company and depends on what is being measured.

A lot of recent work is devoted to tackling this and, as industry minds increasingly collaborate, and frameworks and regulations evolve, measurement and reporting will inevitably become more standardised.

At Select Investors and as part of being a partner practice within St. James’s Place, we are committed to integrating responsible investment considerations into investment decision making. We measure and monitor the companies in which our fund managers invest, drawing on ESG criteria, to ensure we are using money as a force for good.

As a member of the Net Zero Asset Owner Alliance, St. James’s Place has committed to all investment portfolios becoming net zero by 2050, if not sooner, and to being a leading responsible business.

How investing responsibly supports long-term returns

The old myth that investors need to sacrifice some returns if they want to consider environmental, social, and governance (ESG) factors in their investment strategy has rapidly gone out of fashion. There is now plenty of evidence that shows how a company approaches these issues, plays a significant role in long-term performance.

The COVID-19 pandemic, and its impact on businesses, has helped demonstrate the importance of considering more than a company’s balance sheet when it comes to investing your money.

That is why the world’s leading investors are increasingly focused on environmental, social and governance factors when they weigh up which companies to invest in. ESG factors are a set of measures to determine how a company behaves and manages its impact on people and the planet.

The coronavirus pandemic hasn’t been the only recent event to have pushed investors towards a greater consideration of ESG factors. A price war between oil producing regions, combined with renewable energy becoming more affordable, has led to increased investment in green energy production.

The election of Joe Biden in the US marked a departure from the previous administration’s attitude to climate change, and under new administration the US has already re-joined the Paris Agreement and pledged new emissions targets for 2030. Other countries have also indicated shifting attitudes towards the environment.

At the same time, consumers are increasingly considering environmental and social factors in their decision-making processes. Companies seen to ‘give something back’ win more customers and, in turn, improve their bottom line.

All this suggests the global economy is creating a more investor-friendly landscape for socially and environmentally conscious companies.

While the environmental component of ESG tends to dominate the headlines, the ‘G’ – Governance – is often overlooked when, in fact, it is just as important for investors.

While all of this theoretically means that investing in line with ESG principles should lead to better returns, does this bear out in reality? An increasing amount of evidence suggests it does.

First and foremost, this belief is shared by most fund managers. A survey of 104 fund managers by the investment consultancy firm Redington, revealed that 73% of managers believed ESG integration adds positively to financial performance.1

Likewise, data from MSCI found that, in the seven years leading up to 2020, the top third of companies ranked by ESG ratings outperformed the bottom third by 2.56% per year.2 To put this into context, if you were to invest $1m for 10 years and generate 5% p.a. return by investing normally or a return of 7.56% by investing in ESG funds, your portfolio would be $443,669.30 more at the end of the 10 year timeframe.

The pandemic is also accelerating trends that were already well underway, such as the move towards green energy and electric vehicles.  These trends are part of the reason why studies also suggest that improved performance from ESG practices is more evident in the long run.3  Embedding ESG into the investment process is not a ‘quick win’. Instead, it requires extensive engagement between investors and company management.

What You Can Do

There are many small things we can all do to improve the world around us. These include swapping to green electricity, reducing travel, and consideration of where your savings and retirement funds are invested.

The latter is one of the most impactful and can be 27 times more effective at cutting your carbon footprint than eating less meat, using trains instead of cars, taking shorter showers and flying less combined.4

Our world is changing faster than anyone predicted. We believe responsible investing has a huge role to play in shaping a better world and building a sustainable future.

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If you would like to know more about responsible investing’s, please contact Jamie Burgmann, Private Wealth Manager at Select Investors, a Partner Practice of St. James’s Place.

If you would like to know more about what St. James’s Place is doing with responsible investing, please download the Singapore Carbon Emission report June 2021 here and Our Approach to Responsible Investment here.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

Past performance is not indicative of future performance.

 

Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

Sources:

  • Redington, Responsible Investment survey of 104 fund managers November 2020
  • MSCI ESG Research LLC, 2021 ESG Trends to Watch, December 2020
  • New York University Stern Center for Sustainable Business, ESG and Financial Performance, 2021
  • Sustainable finance at Nordea, Nordea, 2019

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AustCham Singapore

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