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Sustainable investing has seen significant growth in its assets under management over the past five years, as more investors now recognise ESG risks and seek to influence policy outcomes. From social justice issues to extreme weather conditions, these topics have been the top agenda for customers, businesses, and policymakers.
The impact of the Covid-19 pandemic has served as a wake-up call to drive the need for a different investing approach, with similarities drawn between the unanticipated risks from the pandemic and issues such as climate and social change. Undoubtedly, investors have become more aware of sustainability issues and climate change.
The Emergence of Sustainable Investing
Sustainable investing is defined as incorporating ESG factors into investment decisions to manage risk better and generate sustainable, long-term returns. To begin with, we need to understand what sustainable development means.
The most common definition is from the United Nations Brundtland Report in 1992, which describes sustainable development as development that meets the needs of the present without compromising the ability of future generations to meet their own needs. In our modern-day economy, the corporate world typically uses ESG as a framework to integrate sustainability into business operations. The allocation of capital has been recognised as a pivotal lever to realise transformative change towards sustainability.
Reasons to Choose Sustainable Investing
Four dimensions capture the key importance and benefits of sustainable investing:
- Contribution to global goals,
- Management of risks,
- Capturing hidden opportunities, and
- Enhancing financial performance
Contribution to global goals: The United Nations’ Sustainable Development Goals (SDGs), established in 2015, define our global society’s greatest challenges and establish a concrete blueprint to promote a better and more sustainable future for all. The 17 SDGs address a range of social and environmental needs, including education, health, social protection, climate change and environmental protection. Similarly, the Paris Agreement of 2016 also establishes a clear target for managing climate change. Sustainable investing allows investors to not only generate returns as with traditional investing but simultaneously put their money to work for good, contributing to a brighter future.
Management of risks: In the latest Global Risks Report, the World Economic Forum continues to identify environmental and societal risks as the top, most severe risks on a global scale over the next ten years. Risks such as insufficient climate action, extreme weather, livelihood crises are factors that investors can no longer ignore. They can translate into material impacts to the real economy and investments. From an investment perspective, putting on an ESG lens to inform investment decisions can help better manage these risks of this era.
Capturing hidden opportunities: In an increasingly complex world, the traditional accounting-based financial analysis is becoming inadequate to cope with other intangible factors. ESG factors manage risks and help identify and capture new opportunities along the transitional pathway of sustainable development. These could include new opportunities from enhanced resilience, new products, and new markets.
Enhancing financial performance: Whilst it isn't easy to pinpoint cause and effect relationships between ESG and financial performance, many academic studies have found a positive correlation between the two. In a meta-study published in 2021, the New York University Stern School of Business found that most individual research papers from 2015 to 2020 found that sustainability had positive or neutral impacts on financial performance.
How to choose a robust sustainable investing strategy
Does the investing strategy incorporate a holistic consideration of ESG?
Only a holistic review of sustainability will ensure a complete view of sustainability, effective risk management, and capturing new opportunities.
Does it have a sound methodology to enhance exposure to sustainability characteristics?
One way is through the "best-in-class" approach, which rates issuers by their sustainability performance and aims to select the best performers in each sector or the investment universe.
Are they flexible to include issuers that may not be the best performers in terms of sustainability today but is quickly and significantly improving in their sustainability performance?
This is known as the "best-effort" approach, which includes the portfolio issuers that have made the most significant sustainable development effort. Having this element to complement the "best-in-class" approach captures more upside potential and new opportunities.
Is the portfolio supported by an active ownership approach?
The philosophy of active ownership is that sustainable investing is a continuous process where the investment manager partners with investee companies, actively collaborating to ensure the companies and investment's long-term success. In practice, this is implemented via active share voting and engagement.
Does the sustainable investing strategy offer transparency into the sustainability outcomes of the investment?
Reporting on impact can give investors peace of mind that their investments are channelled towards sustainability, and it also ensures the transparency and integrity of the sustainable investing strategy.
By investing sustainably, investors know that they are putting their money to better use on wide-ranging issues from climate change, improving working conditions, diversity, and inclusion to tackling inequality.
When you invest sustainably, it reduces the risks by staying clear of companies exposed to unsustainable practices such as labour unrest, pollution or unfair practices that can damage the reputation, leading to undesirable economic performance. With that, we believe that incorporating ESG into the investment decision process can help investors mitigate specific risks and help improve portfolio quality.
Investors seeking to gain exposure in a proven investment process with a positive impact on society may consider the Allianz Global Sustainability fund. The fund is a high-conviction Sustainable Responsible Investment (SRI) principles fund and invests in a global portfolio of quality stocks with sustainable growth at reasonable valuations. It also upholds a disciplined investment process that integrates ESG assessment of prospective investments, focusing on companies with solid aspects of ESG and financial characteristics.
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