Grow your wealth mindfully: Everything you need to know about ESG investing

ESG investing has been on a roll in recent years. Find out how you can craft a portfolio that’ll align with your beliefs while keeping your wealth accumulation plan on track.

It’s crystal clear that the world is in a more precarious position than ever before. 2020 alone was filled with extreme weather events and alarming climate indicators even though air travel ground to a halt for almost the whole year.

According to Antonio Guterres, the United Nations’ Secretary-General, 2021 is a ‘make it or break it’ year for climate action.

A host of social injustices in workplaces were brought to the forefront in 2020 and 2021 too. In Singapore, it was discovered that more employers were investigated for unfair hiring practices in 2020 as compared to previous years.

Likewise for the USA, where approximately three million older employees were unfairly given the boot.

These reasons – and more – are why ESG (Environmental, Social, Governance) investing has been gaining traction since 2019.

According to financial services firm Morningstar, a whopping US$185.3 billion (S$250.8 billion) was invested in sustainable funds for the first quarter of 2021 alone. It’s glaringly obvious that investors are aiming to align their portfolios with their ethics and morals.

Here’s all you need to know about ESG investing and everything you need to get started. Don’t worry, it’s not all that different from investing regularly.

What is ESG investing?

The ‘ESG’ in ESG investing stands for environmental, social, and governance. It’s a form of socially responsible investing that takes into account the aforementioned three factors when you select an investment product.

To help investors make a decision, firms like MSCI, Sustainalytics, and S&P Global Ratings assign ESG scores to publicly-listed companies.

Here’s what each of the three factors mean, but keep in mind that they occasionally overlap:

Environmental – The most clear-cut of all three factors refers to how eco-friendly a company is. For example, how well is it managing its waste products? To what extent is it contributing to deforestation? How severe are its greenhouse gas emissions?

Social – This refers to a company’s internal and external relationships. For example, how committed is it to customer satisfaction? On the flip side, does it engage its own employees well? How about ensuring diversity when hiring?

Governance – This factor judges how impartially a company is run. For example, does it compensate executives fairly? How diverse is its board of directors? And most importantly, does it engage in bribery, corruption, and other illegal business practices?

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Why should I create an ESG investment portfolio?

It’s true that investing should be profit-driven. After all, you can’t really call it wealth accumulation if returns are paltry or even negative.

In recent years however, ESG companies and funds have given their peers a run for their (literal) money. Take the 19 ESG ETFs and mutual funds that outperformed the S&P 500 from March 5, 2020 to March 5, 2021 for instance.

During that year-long stretch, the S&P 500 grew by an impressive 27.1 per cent. However, these 19 ESG ETFs and mutual funds saw gains ranging from 27.3 per cent to 55 per cent during that same period of time.

These weren’t flashes in the pan either, with the top-performing Parnassus Endeavor Fund (PARWX) still charging ahead of the S&P 500 several months later.

Creating an ESG investment portfolio allows you to align your assets with your beliefs while avoiding any issues that might arise from companies failing to adhere to ESG principles.

Volkswagen’s shareholders will wholeheartedly agree as the company’s stock value took a full six years to recover after a 2015 scandal due to poor corporate governance.

What ESG investments can I purchase?

Because ESG investing is a strategy rather than an entirely separate asset class, you can expect the same variety of products as ‘regular’ investing.

These include stocks, bonds, ETFs, mutual funds, and more. This is a huge boon because you can simply integrate ESG investment products into your existing portfolio rather than creating an entirely separate one.

Stocks

As mentioned earlier, there are several firms that assign ESG scores to publicly-listed companies across the globe.

The following businesses are just a sample of those that have sterling ESG credentials while being impressive stock picks in their own right. However, do note that market conditions aren’t static, so do your due diligence before investing.

Nvidia (Nasdaq: NVDA)

MSCI ESG rating	Sustainalytics score	S&P Global ESG score
AAA (Unchanged since 2018)	12.8 (Low risk)	74 (Outperforms industry mean across all three factors)

Any tech geek or gamer would’ve heard of this American tech company. It creates graphics processing units for desktop and laptop computers and has even moved into the software space in recent years.

Its financial data is encouraging, with total revenue and gross profits almost doubling from FY2018 to FY2021. A fifth stock split is set to take effect on July 20, 2021 too.

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CapitaLand (SGX: C31)

MSCI ESG rating	Sustainalytics score	S&P Global ESG score
AA (Unchanged since 2017)	15.6 (Low Risk)	78 (Outperforms industry mean across all three factors)

As mentioned in a previous article, CapitaLand needs little introduction for folks living in Singapore. It has now expanded to over 30 countries across the globe and continues to do so.

Financial indicators are encouraging as the Covid-19 threat dies down, with stock prices recovering to 2019 levels. Its most recent dividend yield of 2.43 per cent is decent as well.

WuXi Biologics (Cayman) Inc. (HKEX: 2269)

MSCI ESG rating	Sustainalytics score	S&P Global ESG score
A (At least an ‘A’ since 2018)	19 (Low Risk)	29 (Outperforms industry mean in two factors)

WuXi Biologics stands out among the Hang Seng Index crowd for having the best ESG credentials. Despite its mediocre S&P Global ESG score, the Chinese biotech company performs well across the other two benchmarks.

Financially, it has been on a tear ever since it was publicly listed in 2017, nearly quadrupling its total revenue and gross profits in four years.

ETFs

VanEck Vectors Semiconductor ETF (Nasdaq: SMH)

MSCI ESG rating	Morningstar rating	Morningstar sustainability rating
AAA (Moderate carbon intensity and passed all social safeguards screens)	Five out of five	Four out of five

Due to skyrocketing demand for microchips and integrated circuits, the semiconductor industry is having its day in the sun. VanEck’s semiconductor ETF allows you to capitalise on this trend sustainably as it boasts favourable ratings from Morningstar and MSCI.

It has seen an average annual return of 27 per cent ever since its inception in 2011. As for the icing on top? A relatively low expense ratio of 0.35 per cent.

Invesco Water Resources ETF (Nasdaq: PHO)

MSCI ESG rating	Morningstar rating	Morningstar sustainability rating
AAA (Low carbon intensity and passed all social safeguards screens)	Five out of five	Three out of five

This passive ETF from Invesco tracks the Nasdaq’s OMX US Water Index, which contains companies that manufacture products to conserve and purify water. It’s a winner on the ESG front, with MSCI and Morningstar giving it the thumbs up.

Financially, you’re looking at an average annual return of nine per cent ever since its inception in 2005 but it has been outgunning the S&P 500 ever since 2016. Unfortunately, its expense ratio is slightly higher at 0.6 per cent.

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Other investment products

For individuals who are too busy juggling work and personal matters, you’ll be happy to know that robo-advisors have dipped their toes into the ESG investing waters.

On March 17,  2021, Endowus launched an ESG solution comprising six actively managed funds and the option for investors to customise their portfolios. You can select a 100 per cent equity or fixed income portfolio, or have one that’s a blend of the two asset classes.

Endowus might be the first robo-advisor in Singapore to grant investors easy access to an ESG portfolio, but don’t expect it to be the last. Syfe for one, offers an ESG portfolio but only to its Private Wealth clients for now.

Likewise for Kristal.AI, who touts complete customisation for its own Private Wealth clients. Who’s to say things won’t change in the near future?

What are the risks of ESG investing?

ESG investing has had its fair share of detractors over the years and it’s hard to fault them. Firstly, each firm listed above has a different methodology when it comes to granting ESG scores to companies or funds.

As shown, this can create discrepancies and cause investors to spend even more time to determine whether a product is truly aligned with their beliefs.

Secondly, zeroing in on investment products with stellar ESG ratings will cause you to miss out on opportunities to grow your wealth at a quicker pace.

Although you can compromise by simply integrating ESG investment products into your existing portfolio, some would say that defeats the purpose of this strategy entirely.

Finally, research has shown that companies and funds being ESG advocates might not necessarily translate into better returns. However, the paper also conceded that firms with poor ESG scores do tend to perform poorer than the market.

Furthermore, it also stated that there is not enough data to work with right now, since ESG investing is a recent trend.

Conclusion

There’s no denying that ESG investing is popular, given how much money has been poured into sustainable funds and companies in recent years.

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Investors are voting with their dollars as they aim to align their portfolios with their ethics and morals.

And given the spate of incidents revolving around each ESG factor in the past year, why wouldn’t they want to do so?

Fortunately, ESG investing does not require a separate platform or set of tools.

Your existing online brokerage account and even robo-advisor will do. It just takes more time and effort to suss out businesses and funds that you resonate with before putting your money down.

And if you’re currently engaging a financial advisor, speak to him/her and determine whether there are any suitable products for you.

After all, it’s safe to say that no one ever wants a repeat of the ocean being set on fire again.

This article was first published in SingSaver.com.sg.