Disclaimer: This is not an endorsement, but an educational piece for people interested to know more about investing sustainably. TWS is still learning about sustainable investments, and we advise our readers to do so as well before committing financially. Sponsored by Fidelity International.
The interest in sustainable investing is HUGE right now.
I know this, because during a webinar we did earlier this year, attendees said they were most interested in portfolios with environmental, social and governance (ESG) considerations; even more so than stuff like emerging tech and China.
At the same time, an increasing number of people have also been asking us about how to get started in ESG investing.
Well, in case you’ve been living in a cave, ESG is a way of investing your money in companies that do the following:
- Be well-run and profitable long-term
- Protect the environment
- Contribute to a fair society
If you ask us, that sounds amazing. Who wouldn’t want to grow their money while racking up good karma?
Perhaps that is why many companies are trying extremely hard to make themselves seem more appealing to investors and customers.
The key word here is trying.
In the same way companies used to magically add ‘.com’ at the end of their names to boost investor interest in the 90s, they are now adding buzzwords to their products: ‘sustainable’, ‘green’, ‘eco-friendly’ and ‘recyclable’. Even if they are nowhere near walking the talk.
That my friends, is greenwashing.
But wait, what’s so bad about greenwashing?
This is our take, from an investor’s POV:
- A lack of transparency
If a company is guilty of greenwashing, it could be a symptom of a bigger problem relating to transparency and honesty. If they are willing to greenwash here, they could cut corners elsewhere. That is an investment risk.
- You don’t actually get any of the potential benefits of ESG
There are two main arguments to invest sustainably:
- ESG companies have a reduced risk of reputational and financial fallouts.
- An increasing number of consumers and organisations are willing to put their money behind companies that are ESG responsible. In theory, this should allow the company to perform better.Theoretically, these two things should make your investments perform better in the long run. If you put your hard earned-money into something, it should do exactly what it advertised.
- Opportunity cost.
Your money could have gone into companies that were truly making an impact instead.
TL;DR: Greenwashing can hurt you as an investor, and you should do your due diligence before jumping onto the ESG bandwagon.
With that said, here are some starting points when analysing whether a company is indeed walking the talk when it comes to ESG.
Be wary of marketing distractions
Ideally, you want to look for a company that has sustainability baked into the business. A holistic approach.
Not one that has a cool side project that attracts marketing hype and other forms of publicity.
However, they might be using this as a cover for other issues: unethical labour, dodgy suppliers, dangerous disposal of chemicals from manufacturing etc.
The devil is in the details
It’s easy to claim the products you’re selling are ‘biodegradable’ or ‘ethically sourced’. But there is no way of verifying these claims, if no details are given.
For example, if a brand wants to say that its product is sustainably produced, it would also be helpful to know:
- What were the materials used for production
- How it was produced
- How much carbon footprint was produced when making the product — whether is it direct or indirect emissions, or emissions produced along the value chain
Without specific details to explain exactly how it’s done, you should view them with skepticism, and assume that they come with some sort of caveat.
*Assuming it is disposed of in a specific way which we have no way or interest of ensuring.
- Made from recycled materials*
*At least that’s what our supplier said, we trust them to do the right thing.
- Ethically sourced*
*Compared to sources that were downright unethical.
- Energy saving*
*Compared to the previous version of this product, which was definitely not energy saving.
Companies can be guilty by association
Here’s a common tactic:
A company brands themselves as sustainable. In reality, they’ve outsourced the unsustainable parts of their business to lesser-known vendors or contractors.
When these contractors and vendors are caught, the company can claim ignorance.
Rinse and repeat.
Companies that do this are not sustainable because they’re enabling bad business practices to occur by paying for their services.
Track records matter
Since investments are for the long term, ideally, you’d like for the company to be sustainable in the long term as well. Easier said than done.
You know how you set fitness resolutions in December, then abandon them sometime in February because you got lazy? Of course you do.
Well, some companies may be like that too.
While there are a handful of companies that have a vision to be sustainable right from the start, others will need to undergo some form of transformation.
In the same way getting six-pack abs often requires a massive change in your lifestyle, it can be challenging for businesses as well. Adapting to new profit models and supply chains is not a walk in the park.
That’s why sustainability efforts may be half-hearted and inconsistent, lasting only for a few months/years.
Perhaps most importantly: Does it make you money?
Here’s our stance of ESG investing – it has to make you money. Otherwise, we would not consider investing in it.
While there will be eco-warriors who balk at putting profitability first, we are adamant about this, and ask that they withhold judgement.
After all, the regular salaryman is not a multimillionaire. Instead, we invest our hard-earned money in the hopes of ensuring we have a comfortable life when the inevitable day comes where our earning power goes into decline.
Is it possible to combine purpose and profitability? Yes, we think so.
Does purpose guarantee profit? No. It doesn’t.
Ideally, ESG companies can achieve both. But as you might have figured out from the above, it’s easier said than done.
(While investing in ESG is ONE way to do your part, most of you reading this blog can also act as a consumer to practice conscious consumption.)
ESG is still a developing field
Don’t get us wrong: we love the idea of ESG investments.
But with this being a new field and in light of widespread greenwashing, it doesn’t hurt to be cautious.
That’s why instead of ape-ing into any random ESG fund/unit trust, we would do the following:
- Understand the ESG landscape by getting familiar with the common terms used in market and what they mean, for example, impact investing, micro-financing, green bonds, etc.
- Do our own research on the ESG trends, and buy stocks or funds whose ESG strategy is aligned with your own criteria of what ‘ESG’ is.
- Go with a fund manager with a good track record and expertise in sustainable investing and research and is aligned with you in terms of what is ‘sustainable’.
Hopefully, in the coming years, we will see a greater partnership between public and private sector to move towards sustainability.
In some ways, a perfect world would do away with the classification of ESG investments, because all investments are ESG.
A pipe dream? Wishful thinking?
Only time will tell.
Stay woke, salaryman
If you’re interested in sustainable investing, there are fund managers like Fidelity with strong expertise and a proven track record in this field.
If you’d like to invest in funds that have purpose and bring long term performance, there are two plays you can make; either spend hours doing your own research, or go with a fund manager with deep research and experience in this field.
Fund managers have the resources to engage with their investee companies if the companies meet ESG benchmarks, are transiting to net zero and the ability to uncover more information than what is publicly available due to its direct engagement and voting rights with investee companies for positive change.
For example, to reduce carbon emissions and preserve biodiversity, Fidelity actively engaged with Suzano, a Brazilian pulp manufacturer to reduce its carbon emissions targets and step up on its sustainability practices and disclosure efforts.
Fidelity, as a global leading asset manager and recognised leader in the area of sustainable investing, approaches this through 3 key pillars:
- Integrating sustainability research, proprietary Sustainability ratings and Fidelity Climate ratings in its investment process
- Actively engaging with corporates to adopt ESG values and practices, and
- Collaborating with key industry stakeholders to drive meaningful change.
Fidelity’s approach to climate change is driven by its objective to cut real-world emissions. They are aligning themselves to the goals set out by the Paris Agreement to reach net zero emissions for all investments by 2050, with an interim target to halve the carbon footprint of its investment portfolios by 2030.
In recognition for its strong commitment to sustainability, Fidelity has won several awards including:
- ESG House of the Year at the Asian Private Banker Asset Management Awards for Excellence 2022;
- Best ESG Manager, Singapore, at Asia Asset Management Best of the Best Awards 2022;
- Best ESG Engagement Initiative, Singapore at Asia Asset Management Best of the Best Awards 2022 and 2021; and
- The Benchmark Fund of the Year Awards 2021 for ‘Best-in-class: ESG Integration’ and ‘Outstanding Achiever: Stewardship’
Find out more about sustainable investing at Fidelity here.
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