Environmental, Social and Governance (ESG) investing in Singapore has been gaining significant traction in recent years, spurred by the government’s ambition to position itself as Southeast Asia’s green finance hub through various strategies and schemes.

Correspondingly, there is also growing uptake for sustainable investments, as revealed in the IMAS 2023 Investment Managers’ Outlook Survey, with ESG named as a top driver of investment growth.

To uncover the importance of ESG investing and prospects for this burgeoning sector, the Wealth Management Institute (WMI) sat down with Professor Satyajit Bose, the Lead Faculty for ESG and Sustainable Investing at WMI, and Professor of Practice at Columbia University, Earth Institute.

“ESG performance refers to a company’s effort to incorporate environmental, social, and governance risks & opportunities into their business strategy and operations,” says Professor Bose. “It is critical to ensure that the pursuit of profit is not detrimental to either long-term shareholder value or societal interest.”

For asset managers, this calls for a need to integrate ESG factors into screening, due diligence, portfolio construction and risk management processes to compete in the new ESG normal and win the trust of long-term investors.

Understanding ESG Performance

ESG factors refer to the non-financial criteria and key performance indicators (KPIs) that investors use to evaluate a company’s impact on the sustainability of the social and environmental systems upon which the economy depends.

Environmental criteria assess a company’s interactions with the environment, including energy and water consumption and waste disposal. Social criteria evaluate a company’s relationships with its stakeholders in the community, including diversity, inclusion, and adherence to labour standards.

Governance criteria examine a company’s internal policies and practices, such as executive compensation and whistle-blower protection, to ensure that they are designed to safeguard the long-term interests of all shareholders and affected stakeholders. “The specific ESG factors that are most important to a business will vary depending on industry, business model, and stakeholders,” adds Professor Bose.

Presently, there is no universal ESG standard to evaluate ESG performance. Many investors rely on company-reported data and third-party assessments from ESG raters such as Sustainalytics, MSCI, Wind ESG or SynTao Green Finance . Raters construct ESG scores based on proprietary methodologies whose criteria and focus vary considerably.  While such ratings are somewhat useful for an initial assessment of ESG performance, it is essential for investors to do their own groundwork and form their own interpretation of ESG data to add value to their capital allocation process.

The Power of Sustainable Investments

Fundamentally, ESG investing creates a positive impact on the earth and society. Investors have the power to influence companies’ decisions and promote accountability through sustainable investments.

With more investors demanding accountability and responsibility over ESG matters, we are more likely to see companies taking action to enhance their sustainable and ethical practices. From increased efforts to reduce carbon emissions to significant improvements in labour protection, ESG investing is driving change towards sustainability and social responsibility in companies.

In terms of benefits for asset managers, ESG investing is a vital tool for managing risk and enhancing resilience. According to a report by MSCI, ESG-focused companies may be more resilient to external shocks and less susceptible to systematic risks. ESG investing plays a crucial role in identifying and addressing potential risks that may not be captured by classic financial analysis.

There are many ESG factors, such as social inequality and climate change, that significantly impact a company’s long-term financial performance but are often ignored through traditional assessments. Ignoring these risks can result in adverse consequences including reduced labour productivity, input inefficiency, legal liabilities, and reputational damage. By incorporating ESG considerations into investment decisions, investors are better equipped to manage these risks and achieve long-term shareholder value.

This enhanced risk management and resilience leads to lower costs and better operational efficiency, eventually boosting financial performance and investment returns. In addition to uncovering ESG growth opportunities with higher returns, a strong ESG proposition enhances investment returns by allocating capital to more sustainable opportunities and avoiding investments fraught with environmental risk.

In fact, research by sustainability data firm ESG Book showed that a model portfolio of ESG-driven companies in Asia-Pacific reaped an annual average outperformance of 1.02% over the past five years. This demonstrates that ESG considerations can boost financial performance and returns even in volatile and unfavourable market conditions across extended periods.

Emerging Trends in ESG Investing

The field of ESG investing in Singapore is set on the path to continued and exponential growth, with new trends and developments emerging regularly.

One area is an increasing recognition of how ESG factors may provide a more holistic view of investment opportunities and risks. ESG integration enables investors to factor in a broader view and may lead to better investment decision-making.

Among different investing approaches, impact investing has seen emerging interest in Singapore. “​​Impact investing provides capital to companies and funds that have a measurable positive impact on society and the environment,” explains Professor Bose. The COVID-19 pandemic also heightened interest in this area, as it showed the interconnectedness of social and environmental challenges and the need for impact considerations.

Another emerging trend in this sector surrounds fixed income investing. Equity has been the dominant asset class when it comes to ESG mandates, but the illiquid and long-term nature of bonds makes ESG analysis more vital for fixed income than equities.

With almost 20% of gross issuance in green, social, and sustainability, the growth of sustainable fixed income in Asia is set to accelerate in the coming years. Incorporating ESG investing in fixed income will attract investors who not only seek to reap high returns, but also to fulfil objectives that benefit the environment and society.

“I believe that a focus on sustainable investing, in its various forms, will continue to grow in importance in the coming years, driven both by increasing investor demand for responsible investments and widespread pressure on companies for broad societal legitimacy. As a range of global crises highlight sustainability risks & opportunities, ESG factors will become even more critical to long-term financial performance,” Professor Bose emphasises.

As clients – from retail investors to family offices and institutional investors – become increasingly concerned about environmental and social issues, ESG investing is likely to become even more mainstream in the coming years. This growing demand means that wealth and asset management professionals will need to build the right ESG skillsets to stay ahead of the curve.

Diving into ESG Investing

Success in this sector requires developing specialised skills and knowledge in key ESG aspects to effectively build and manage portfolios and meet clients’ needs. This includes training on sustainable investment techniques and ESG investment evaluation methodologies.

On top of continuous professional development and training, be sure to define your clients’ ESG values and priorities, and set clear investment objectives to build a successful ESG portfolio. It is crucial to conduct thorough analysis on potential investments and finding the right ESG investment strategy for you, be it screening strategies, ESG integration or others.

As you build and manage successful ESG portfolios, a strategy to communicate your ESG performance to stakeholders is essential. With greenwashing being an issue of great concern across industries, maintaining end-to-end transparency is key in ESG reporting.

“Companies that are transparent about their ESG performance and have strong governance practices may be seen as more trustworthy and reliable by investors, customers, employees and communities,” says Professor Bose.

Adopting an always-on approach is also an important aspect of ESG reporting. By facilitating ongoing monitoring, reporting and improvement of ESG performance, your credibility is enhanced as stakeholders are kept well-informed of your ESG efforts throughout the year.

Getting Started on Your ESG Investing Journey

As sustainability increasingly takes centre-stage in the country, asset managers must now develop a robust ESG framework to overcome ESG risks and meet the growing demands for sustainable investments.

On top of staying updated with ESG trends and developments, deepening your expertise in ESG is key to advancing in the industry.

WMI provides ESG programmes conducted by leading sustainability and ESG experts which equip you with the knowledge and skills you need to compete in the new ESG-dominated investment world.

Put your skills into practice through the upcoming Certificate in Applied ESG Investment and Advisory programme