Temasek has S$44 billion in sustainability investments. Should you put your money in such stocks too?

SINGAPORE: Would you consider a company's carbon footprint, labour practices and leadership diversity before buying its shares?

Institutional investors often consider environmental, social and governance (ESG) factors before putting their money in a company, but the motivations for doing so likely differ for retail investors.

“Consumers invest in sustainability based on awareness and voluntary action whereas institutions do it mainly for regulatory compliance, and at times to achieve business strategy goals,” said Mr Jigar Shah, head of sustainability research at Maybank Investment Banking Group.

OCBC’s head of group wealth management Tan Siew Lee holds a similar view. “For consumers, investing in sustainability often stems from personal values or the desire for long-term financial sustainability,” she said.

Institutions have to integrate sustainability into their core operations based on industry standards and market expectations, she said.

The topic of sustainable investing gained attention when Singapore state investor Temasek launched its first sustainability report last week, revealing a “sustainable living” portfolio valued at S$44 billion (US$32.7 billion).

Temasek’s net portfolio value stood at S$389 billion as of Mar 31 this year.

WHY INVEST SUSTAINABLY?

People used to think that socially responsible investing meant sacrificing profits. But socially conscious companies can be profitable too – and the investing community is realising this, said Mr Ling Seng Chuan, head of financial planning, insurance and investment at DBS Bank.

Ms Eugenia Koh, global head of sustainable finance, wealth and retail banking at Standard Chartered, said it increasingly makes sense for consumers to look at sustainable investments.

“It helps them with enhanced risk management and opportunities that capitalise on long-term structural trends,” she said.

For example, companies may be affected by extreme weather events, evolving regulations or the introduction of carbon taxes. So considering the environment factor when investing is increasingly important even for retail investors, she said.

Ms Tan of OCBC said companies tend to be more resilient if they are run responsibly, prepared for future challenges and are looking into emerging risks and opportunities.

As more countries develop regulations, money is likely to shift to companies with strong disclosures on sustainability, she added.

Investing sustainably is inevitable for businesses, industries and governments, said Mr Stephen Beng, head of ESG at Phillip Capital Management.

“But most importantly (it's) what our planet calls for if we are to continue reaping the many benefits of the ecosystem services our natural world provides.”

HOW TO GET INTO SUSTAINABLE INVESTMENTS

For consumers who want to build a sustainable investment portfolio, Mr Ling of DBS said they should conduct their own research and decide what issues are most important to them.

Some questions to consider include the size of the company’s carbon footprint, whether it uses renewable or green sources of energy and whether its workers are fairly paid.

Other factors such as board member appointments and minority shareholder rights may also be relevant, said Mr Ling.

“It is important to know that companies – even the most socially responsible ones – are not likely to tick all the boxes,” he said, adding that there could also be cases of false reporting.

Ms Koh of Standard Chartered outlined three common approaches that retail investors use. The first is exclusions – where consumers avoid controversial sectors such as tobacco, gambling and coal to align with their values.

The second is ESG integration, which acknowledges that non-financial risks and opportunities can be financially material to an investment.

The final one is focusing on sustainability themes such as climate change mitigation, water and energy transition.

“With ESG integration, consumers would be able to build more resilient portfolios through considering a broader range of risks, and with sustainable themes, they have the opportunity to capture some of the macro trends,” she said.

OCBC’s Ms Tan pointed to exchange-traded funds that have been screened for ESG factors as a convenient way to invest sustainably.

The bank has an electric vehicle portfolio and an impact investing portfolio that customers can invest in. The former has a one-year annualised return of 23.08 per cent, while the latter reported 14.02 per cent for the same indicator.

“These do not represent the entirety of sustainable investments’ market return expectations but give an idea how sustainable investing doesn’t automatically mean lower returns,” said Ms Tan.

MISALIGNMENT, GREENWASHING

That said, retail investors need to be aware of greenwashing and changing global sustainability standards, Ms Tan added.

“Funds previously considered sustainable may no longer qualify – making it difficult for investors to identify sustainable opportunities,” she said, adding that local guidelines and global regulations can lend credibility and clarity to investments.

There may also be a misalignment of sustainability strategies with investor goals.

Some companies may prioritise tangible environmental and social outcomes over financial returns. An investor who is seeking returns together with impact may be dissatisfied with an investment in such a company, she added, noting that such a situation could perpetuate the misconception that sustainable investing means returns must be sacrificed.

“Alignment ensures that sustainable investing can provide both financial returns and positive societal impact,” she said.