A Beginner's Guide To ESG Investing
ESG stands for environmental, social and governance. ESG investment, says Angela Kwan, co-founder of Catalyser, which allows large companies to co-ordinate and quantify the social impact of their employees’ charitable activities, “recognises that immediate profits or share prices are not the only measures of company health and success, and recognises the social impact and accountability of corporations to the broader communities they operate in”.
That, as Kathlyn Tan, Singapore-based director of the Rumah Group, who leads her family investment company’s sustainability initiatives, puts it, “could include assessing a company’s impacts in areas like anti-corruption, emissions, environmental compliance, occupational health and safety, as well as diversity and equal opportunities, among many others”.
So it means compromising on returns?
On the contrary: the view that ESG investment necessarily involves taking a financial hit is outmoded. In fact, it’s gone mainstream, says Durrie Hassan, Malaysia-based executive director of philanthropy and impact investment company Visible Mission.
“The majority of stakeholders in financial markets, from publicly listed companies to private equity funds, now actively report on their ESG criteria and related impact frameworks. It is becoming more of the norm for these stakeholders to address ethical and responsible issues in their operations.”
According to Kwan, though, thinking solely in financial terms misses the point. “I think it delivers returns but also changes definitions of ‘return’ beyond just earnings and profits. ESG is most effective if it is integrated into all aspects of company operations and culture, and can deliver value in multiple forms.”
Who's doing it?
A lot of people: in the US, about a third of assets are managed with ESG considerations, according to the Forum for Sustainable and Responsible Investment. The US and Europe are the most active markets, according to Hassan; in Asia they’re mainland China, Hong Kong, Singapore and Japan. Both institutional and individual investors are heavily into it, he adds. “There is a lot of support for ESG investing from pension and insurance funds, and family offices.”
How do I get involved?
Actually, quite easily—these days there are numerous different options for introducing an ESG approach into your investments. “There is no rule to how you go about starting ESG investing,” says Tan. “An ESG lens can be applied across different asset classes that you might choose to consider. Depending on your circumstances, you could add new ESG-focused investments to your existing portfolio, replace existing investments, or perhaps create an entirely new ESG-focused portfolio.”
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How do I judge whether it's worked?
It’s easy to judge success using a traditional bottom line, not so easy with intangible ethical objectives. And even if you can come up with a framework, there’s the challenge of gathering the data to make the assessment.
“I think the biggest opportunity is looking at how technology, innovation and data analytics can be used to make ESG reporting more transparent, measurable and comparable so that knowledge and best practices can be shared and compared globally,” says Kwan.
Fortunately, adds Tan, this is already happening. “There are an increasing number of tools and services available for investors to leverage in the form of ESG scores and rating tools, as well as ESG research and advisory.”
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