Over the last few years, Environmental, Social and Governance (ESG) investing has become one of the biggest topics in the investment community globally. With surging investors interest, growth of ESG investing was tremendous at over 30% worldwide since 2012. The AUM that using ESG strategy is estimated at over $20 trillion in 2018, or around a quarter of all professionally managed assets around the world. The remarkable rise of ESG investing was not limited to Europe and America, but is also growing extensively in emerging markets such as Malaysia, China and India. Indeed, listed companies in Hong Kong are mandatory required to publish ESG report since 1 Jan 2016, while the SFC of Hong Kong is also working hard to enhance the quality of disclosure of SFC-authorised green or ESG funds in recent years.
Why ESG investing is important?
ESG investing, used synonymously with sustainable investing and socially responsible investing (SRI), is an investment strategy that takes into account the consideration of environmental, social and governance (ESG) factors along with financial factors in the investment decision-making process. It has revolved over the years from simply screening out companies based on ethical, moral or religious grounds, to including companies to reward good behaviour or encouraging them to change business practices. Today, shifting demographics and other long-term trends are underpinning the growing importance of ESG among institutional, wealth and retail investors. For example, the world’s largest asset owner – Japan’s $1.5 trillion Government Pension Investment Fund (GPIF) is a big supporter of ESG and sustainable investing, while the millennial generation and female investors now pay more attention to factors other than pure profitability, e.g., the climate change risk, human rights and responsibility of management to shareholders, employees and other stakeholders. Investors are more than welcome to see if their investment would make the world better.
How’s the performance of ESG funds?
There’s still no consensus and guarantee that ESG or SRI investing will outperform non-ESG funds over the long-term, in particular the sample pool and data is not large enough to make a persuasive conclusion. On one side, a recent study from Morningstar show that 73% of the ESG-screened indexes (41 of 56) outperformed non-ESG equivalents since inception, while on average, sustainable funds have outperformed their conventional peers in down markets over the last four years. Besides, some studies also suggest that companies with robust ESG practices displayed a lower cost of capital, lower price and earning volatility and lower bankruptcy risk, while market is generally willing to pay a premium valuation to these high-quality companies. On the other hand, another study by Wayne Winegarden, an economist of the Pacific Research Institute, argues that only 7% of US. Equity ESG funds (10 of 148) outperformed the S&P 500 index over a 10-year horizon. However, it has to note that S&P 500 index may not be an appropriate benchmark for all these ESG funds as they may have a very different risk and investment focus.
In a nutshell, there is still an ample room for ESG or sustainable investing to grow over the next decade. At the same time, there are still plenty of challenges going forward such as supportive regulation, investors education, transparency as well as the quality of ESG data. Nevertheless, ESG investing has now become more mainstream than ever where it can greatly accelerate market transformation for the better, which is something investors (or Hong Kong) cannot afford to ignore.