Can a company “do well” by doing good?

Temasek and global investment firm BlackRock certainly think so. Last month, the duo announced a new partnership called Decarbonization Partners, which will jointly commit US$600 million to decarbonization investments.

The partnership will launch a series of late-stage venture capital and early-growth private equity investment funds that will focus on advancing decarbonization solutions that it says will “accelerate global efforts to achieve a net zero economy by 2050”.

The Temasek-BlackRock partnership illustrates how climate change presents a significant investment opportunity. It is also part of the much larger trend in the financial world – that of ESG investing.

What is ESG?

ESG – which stands for Environmental (E), Social (S) and Governance (G) – measures the sustainability and societal impact of an investment in a company or business. It includes diverse concerns ranging from carbon emissions to human rights to executive compensation.

So why is ESG important to your company’s long-term value proposition?

Here are five reasons why:

1. ESG investing is fast growing across the global market.

Once considered niche, global sustainable investment now tops US$30 trillion – up 68% since 2014 and tenfold since 2004, according to management consulting firm McKinsey.

From its research, ESG links to cash flow in five important ways:

1. Facilitating top-line growth
2. Reducing costs
3. Minimizing regulatory and legal interventions
4. Increasing employee productivity
5. Optimising investment and capital expenditures.

Locally, the Monetary Authority of Singapore will institute a US$2 billion Green Investments Programme as part of its Green Finance Action Plan, which aims to establish the country as a leading centre for green finance in Asia and globally.

2. It reflects changing investor sentiment worldwide.

A HSBC survey report last month showed 80% of Singapore investors believe sustainable, environmental and ethical issues are central to managing their investments.

This reflects global attitudes.

According to Business Times, the latest Schroders Global Investor Study – an annual survey that polled more than 23,000 people from 32 locations around the world, including China, India and the United States – found that 77% of retail investors refuse to compromise on their personal beliefs when investing.

And while millennials are traditionally cited as being particularly receptive to ESG investing (eg a 2019 Morgan Stanley report showed 95% of millennials now express interest in sustainable investing), S&P Global reported last year that ESG investing is in fact a multi-generational conversation, with “baby boomers more likely than millennials and Gen Xers to say that the reason they want to participate in ESG investing is to encourage companies to be good corporate citizens.”

With investors now more likely to scrutinise asset managers on sustainability issues, the onus will be on companies to show how their ESG priorities link to value and present hard metrics that feed into business models.

3. Being ESG-forward is linked to higher financial returns.

Although there can be wide discrepancies in practice, McKinsey found customers are willing to pay to “go green”, with corresponding payoffs.

As an example, it cites Sunlight, a brand of dishwashing liquid developed by Unilever that used much less water than its other brands. Contrary to expectation, sales of Sunlight and Unilever’s other water-saving products proceeded to outpace category growth by more than 20% in a number of water-scarce markets.

It also cited Finland’s Neste, which was founded as a traditional petroleum-refining company more than 70 years ago. It now generates more than two-thirds of its profits from renewable fuels and sustainability-related products.

And in a recent McKinsey Global Survey, 83% of C-suite leaders and investment professionals say they expect that ESG programs will contribute more shareholder value in five years than today.

4. On the flipside, ignoring ESG can bring peril.

A company’s failure to safeguard its ESG principles can result in governmental or regulatory sanctions and reputational damage.

This can harm shareholder value.

Consider, for example, Volkswagen’s emission tests scandal and Facebook’s data use and privacy controversies.

5. COVID-19 could prove a long-term catalyst for ESG investing.

For many policymakers and investors, the pandemic serves as a wake-up call that underscores the need for a different approach to investing, as parallels have been drawn between the unforeseen risks of a pandemic and issues such as climate change.

Sustainable funds – or portfolios for ESG – have also been shown to outperform the broader market during the pandemic, according to BNP Paribas Asset Management in a CNBC report. Sustainable funds showed strong outperformance across indexes, such as the MSCI equity index and S&P 500 according to its analyst, who also added that looking at ESG factors would also provide a broader view of risk and opportunity, which can lead to better insights, investment decisions and better risk-adjusted returns.

As such, ESG investing is something everyone should consider as it allows you to have profit and impact.

What’s your take on the importance of ESG investing in the short and long term?

Should companies in Singapore do more to promote sustainable development?

What role do ESG principles play in your investment portfolio and is it adequate?

Daphne Ng

Co-Founder & CEO @ Dedoco | Dedoco Verify | Dedoco ID

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