What Is Sustainable Investing And Should You Invest Into It?
Did you know that one of the key themes in the 12th Malaysia Plan is to focus on advancing sustainability? This is part of our country’s plan to become a carbon-neutral country by 2050, which includes companies adopting Environmental, Social, and Governance (ESG) practices.
Now, you’re probably wondering, “What does ESG have to do with me?” and “Is this something I should invest in?”
Well, we will try to explain what ESG is, what the benefits are for investing in it, and how you can get started.
Understanding the basics of ESG
ESG is an acronym for Environmental, Social, and Governance. It is a holistic approach that companies adopt for sustainability efforts that goes beyond just environmental issues.
As to what that means, here’s a quick rundown of what each letter means:
E for Environmental
The environmental component of ESG is how the company affects the planet with:
- Climate change policies
- Carbon footprint or carbon intensity
- Renewable energy initiatives
- Recycling and waste disposal management practices
- Green practices, products, infrastructure, and technology
S for Social
This is focused on areas that affect the company’s employees, consumers, customers, community, or even suppliers through:
- The well-being of employees, and their compensation & benefits
- Training and development of employees
- Inclusion and diversity in hiring, promotions, and salary increases
- An ethical supply chain
- The company’s public stance on social issues
- The act of giving back to the community
G for Governance
This refers to the leadership, shareholders, and overall business ethics aspects of a company that is accountable for:
- Promoting transparency within shareholders’ communications
- Diversity within the board and management team
- Enforcing ethical business practises through policies
As to how it relates to investing, ESG-compliant investing means putting your money into investments that are socially responsible, or in other words, sustainable investments.
What are the benefits of ESG-compliant investing?
Aside from the obvious fact that you will be investing in companies that aim to make the world a better place, there are other potential benefits that come with putting your money towards ESG investment.
1. Lower volatility / lower risk
ESG quality may be associated with lower risk, and when a company has a high ESG rating or score, it has the potential for lower volatility compared to its non-ESG peers based on a report by Morningstar in 2020. And when you have a portfolio with the potential for lower volatility, then it may have a potential for higher risk-adjusted returns.
An ESG rating measures the company’s exposure to long-term environmental, social, and governance risks.
Typically, the higher the rating or score of the company or holdings, the better it is at managing those risks.
2. Comparable performance to non-ESG compliant peers
ESG investments could be capable of delivering comparable, or even outperforming, investments that do not integrate ESG practices, as they are generally considered better-run from a governance perspective.
Companies that are focused on ESG may have sustainability strategies which may lead to better risk management, better operational efficiency, more cost savings, more innovation, and lower employee turnover. All of those factors have the potential to increase shareholder value and help financial performance.
4. The ESG boom in Malaysia
In addition to the 12th Malaysia Plan, our country has started to show more interest in ESG investing with more companies listed within the ESG index, FTSE4Good Bursa Malaysia (F4GBM).
A study conducted by PwC Malaysia also shows that more financial institutions are making efforts toward ESG imperative with 90% of the 14 Malaysian banks polled assigning departments to operationalize ESG.
Learn more about Principal’s commitment to Sustainable investing and ESG
Principal® Malaysia is a part of Principal Financial Group® (Nasdaq: PFG), a global financial company with 18,500 employees passionate about improving the wealth and well-being of people and businesses. PFG has been in business for more than 140 years, helping more than 51 million customers plan, protect, invest, and retire, while working to support the communities where we do business, and build a diverse, inclusive workforce.
As signatories to the Malaysian Code of Institutional Investors (MCII) and United Nations Principles of Responsible Investment (UNPRI), Principal Malaysia is committed to driving sustainable practices in its business and influencing corporate behaviour in the investments they make for its customers. Learn more about their commitment to Sustainable investing.
What are the Sustainable Development Goals (SDG)?
The Sustainable Development Goals are a blueprint created by the United Nations to achieve a better and more sustainable world for all. They address the global challenges we face, including poverty, inequality, climate change, environmental degradation, peace, and justice. There are 17 goals in total, which are:
- No Poverty
- Zero hunger
- Good health and well-being
- Quality education
- Gender equality
- Clean water and sanitation
- Affordable and clean energy
- Decent work and economic growth
- Industry, innovation, and infrastructure
- Reduced inequalities
- Sustainable cities and communities
- Responsible consumption and production
- Climate action
- Life below water
- Life on land
- Peace, justices, and strong institutions
- Partnership for the goals
- Learn more
In addition, Principal has adopted the ESG definition set by the United Nations-sponsored Principles for Responsible Investment (UNPRI) as part of their Responsible Investment Policy, in determining whether an asset adheres to the ESG standards.
If you are an investor and want your investment to reflect your values on social and environmental issues, then investing in ESG can be a great alternative to not only diversifying your portfolio but also playing a part in making the world a better place.
“Environmental, social and governance responsible investing (ESG) is qualitative and subjective by nature, and there is no guarantee that the criteria utilized, or judgment exercised, will reflect the beliefs or values of any one particular investor. Information regarding responsible practices is obtained through voluntary or third-party reporting, which may or may not be accurate or complete, and such information is used to evaluate a company’s commitment to, or implementation of, responsible practices. Socially responsible norms differ by region. ESG, while a component of our investment analysis, is only one part of the overall assessment in our decision-making activities. ESG criteria may present additional advantages or risks and does not protect against market risks or volatility. You should not make any investment assumptions based solely on the information contained herein. There is no assurance that the socially responsible investing strategy and techniques employed will be successful.”