As global challenges such as climate change and social inequality intensify, sustainable investing offers a more ethical choice for investors.
Sustainable investing integrates environmental, social, and corporate governance (ESG) factors into an individual’s investment thesis.
Investors not only champion corporate responsibility but position themselves to benefit from the long-term growth of companies that incorporate such factors.
It’s a win-win: sustainable investing is not only good for the planet and will also do wonders for your portfolio
The growing trend of sustainable consumption
A recent survey conducted by Rakuten Insight brought some positive results to light.
The survey, involving over 109,000 consumers across Asia-Pacific (APAC), reveals increasing consumer commitment to sustainable consumption.
Key findings indicate that nearly half of respondents (44.9%) prioritise buying sustainably-made or eco-friendly products, a considerable increase from 2022 (43.3%).
Notably, Gen Zs are spearheading this trend, with 88% valuing sustainability followed closely by Baby Boomers at 79%.
Consumers are also willing to pay more for sustainable products, with the percentage increasing from 67.6% in 2022 to 67.9% in 2023, particularly among younger generations.
The influence of consumer trends on sustainable investing
The shift in consumer behaviour towards sustainability also affects the financial sector.
The growth in demand for sustainable products is reshaping markets and motivating investors to consider the impact of their investments.
According to a study conducted by Kroll, their “ESG Returns Study” discovered that companies with better ESG ratings generally outperformed their peers from 2013 to 2021.
Specifically, companies considered “leaders” in ESG achieved a compound annual return of 12.9%, compared to 10.9% for average companies and 8.6% for those lagging behind.
This difference in returns can be attributed to several reasons.
Companies with sustainability initiatives often see gains in operational efficiency, better risk management, and have the ability to attract and better retain talent, thereby spurring innovation and driving their financial performance higher.
One example of such a leader is Adobe (NASDAQ: ADBE).
Screened by MSCI (NYSE: MSCI), Adobe is recognised for its decarbonization efforts as the company aims to reduce its carbon footprint by 2.27% annually.
The company has also embedded key issues such as gender equality and labour rights into its company’s core mission.
With no involvement in controversial products such as weapons, alcohol or tobacco, Adobe is one of the leaders in ESG ratings.
Adobe is awarded a triple A Grade, making it a leader among 475 companies in the software & services industry.
Re-assessing your portfolio
The compelling evidence of superior returns among ESG leaders underscores the tangible benefit of incorporating sustainability into a Smart Investor’s portfolio.
In a supportive move, the Singapore government has recently mandated climate reporting for all listed companies on the Singapore Exchange (SGX: S68) from 2025 onwards.
This policy enhances transparency between investors and companies and encourages firms to stay committed to their sustainability initiatives.
Investors can also evaluate a company’s commitment to sustainability by reviewing its annual sustainability report, which covers other aspects such as corporate governance.
Investors can access ESG ratings through various platforms, such as The Morningstar Sustainability Rating, to make a more informed choice.
For new investors or those who prefer not to engage in in-depth analysis, sustainable ETFs covering multiple geographical regions in APAC are also available on SGX.
Some of the available ETFs listed in SGX are Lion-OCBC Securities Singapore Low Carbon ETF (SGX: ESG) covering Singapore or CSOP Low Carbon ETF (SGX: LCS) which covers the APAC region.
There are also popular ESG ETFs abroad.
Some examples include iShares ESG Aware MSCI USA ETF (NASDAQ: ESGU) and Vanguard ESG U.S. Stock ETF (NYSEMKT: ESGV), which provide exposure to US stocks with strong ESG practices.
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Disclosure: Aw Kai Rui does not own any of the stocks or ETFs mentioned in this article.
