Earthly Treasures: Sustainable Investments In A Low Carbon Economy
HSBC Private Banking Focus
Environmental, social and governance (ESG) factors are now part of the mainstream investment practices, driven by regulatory changes, government support, growing interest in sustainability among the millennial generation, and the increasing urgency of environmental issues – particularly in Asia. But an ESG-based approach to investing isn’t just about doing the right thing, according to Fan Cheuk Wan, managing director and head of investment strategy and advisory for Asia for HSBC Private Banking, it may also be a way to improve risk-adjusted returns.
“Investors increasingly see the value of integrating ESG factors into the investment process,” says Fan. “We see ESG factors as not only an effective tool to protect portfolios from environmental, reputational and governance risks—particularly in emerging markets—but one that will result in more optimised investment returns in the long term.”
The idea that sustainable investing involves a compromise when it comes to returns is outmoded. The MSCI Emerging Markets ESG equity index, for example, has outperformed the benchmark MSCI Emerging Markets index by 16 per cent over the past five years. As a result, in Asia and globally, leading asset managers and pension funds are getting increasingly involved in sustainable investing.
“I think ESG investing is in the process of becoming mainstream in Asia,” says Fan. “An increasing number of institutional and private investors are starting to incorporate ESG factors in their investment process.
“Government pension funds in Asia are really taking the lead. Japan’s Government Pension Investment Fund, the world’s largest with USD1.3 trillion assets under management, decided to raise its allocation of ESG investments to 10 per cent of its equity holdings, up from 3 per cent in July 2017. We also see a similar trend in places like South Korea and Taiwan. Their national pension funds set aside specific funding for ESG investing because they recognise the merit of ESG investments in generating long-term, sustainable financial returns. This development also sets standards of best practices for private pension funds as ESG investing goes mainstream in the region and is no longer a niche investment.”
ESG investing is going to increase in Asia over the medium term as massive wealth will be transferred to the millennial generation in the coming decade, adds Fan. “There’s a strong demographic driver to change investor behaviour, with millennial investors becoming more passionate about making a positive impact and finding opportunities that reflect their values and beliefs. They are the people who will drive investment decisions in the coming decade, so we expect an increasing fund flow into ESG investments in the coming years.”
The rising popularity of ESG investing in Asia will be further boosted by the region bearing the brunt of a great deal of the world’s environmental damage. China, as the world’s largest carbon emitter, has assumed a global leadership role in fighting climate change and spearheading the green revolution. The Chinese government is addressing its environmental issues head-on by supporting innovation and a rapid expansion of the green bonds market. It went from issuing zero green bonds in 2014 to overtaking the US as the world’s largest issuer in 2016. It was the world’s second largest green bonds issuer in 2017—responsible for 15 per cent of the global market.
“China has set a strategic goal to shift towards a lower-carbon economy that is more environmentally sustainable. Apart from strong government policy support, we have also seen substantial technological innovation happening in China, which helps to make green projects more cost-effective,” says Fan. “As China is migrating from a middle-income to a high-income economy, it plans to transform its growth model to one that puts emphasis on technological innovation, productivity gains, sustainability and quality growth.
“The national policy agenda to promote development of green energy and sustainable infrastructure provides new opportunities for investors. In the past, green developments were not high on the government policy agenda, and there were relatively few investment opportunities in the green space.
“Now, there has been a rapid growth in the green bonds market and supply of equities in the alternative energies, environmental protection and electric vehicles spaces. In the past, private investors searched for sustainable investment opportunities mainly in the private market, but new investment solutions have been opening up over the past few years in the public market, especially in the fixed-income and ETF space.”
HSBC Private Banking is the perfect partner to help investors navigate those opportunities on the journey to a low carbon economy, according to Fan. “We have a strong commitment as a bank to sustainable development and ESG values. ESG principles are already embedded in the investment process of our Global Asset Management division, which manages our discretionary mandates and is a signatory to the Principles for Responsible Investment.”
HSBC has long demonstrated its strong commitment to sustainability. In 2006 it was among the first organisations to sign up to the Principles for Responsible Investment. Since 2012 it has also signed up to the United Nations’ Principles for Sustainable Insurance, became a founding member of the Green Bond Principles in 2015, and joined the Sustainable Development Investment Partnership in 2016. HSBC also issued the first corporate sustainable development bond in support of the UN’s Sustainable Development Goals. In 2017, the company pledged US$100 billion in sustainable financing and investment for clean energy and low-carbon technologies.