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Make your investments sustainable
SUSTAINABLE investing is an investment approach. This approach takes into account environmental, social and governance factors in addition to traditional financial criteria in portfolio selection and management. Today the question has evolved from "Why should I?" to "How do I?".
Globally, out of US$80 trillion assets under management in the capital markets, over US$30 trillion are sustainable assets. The amount of assets managed with sustainable considerations have increased rapidly by more than 200 per cent since 2010, and by 35 per cent in two years from 2016.
Three in four US asset managers say that their firms now offer sustainable investing strategies, up from 65 per cent in 2016. And 93 per cent of the world's 250 largest companies by revenue based on the Fortune 500 ranking of 2016 report provide corporate responsibility reporting.
So, how do I start?
THREE STEPS TO SUSTAINABLE INVESTING
The first step in sustainable investing is to define your values and objectives.
You can start by asking some questions. What are the areas in life that inspire you? What do you aspire for the next generation when you consider the world that they would live in? What are the areas that contradict with your values?
Next, define your objectives. As an organisation, what is the firm's core mission and purpose? For example, a university might have a mission to develop future generations of global citizens, and a family in the private hospital business might aspire to enable everyone to lead healthy lives regardless of income levels.
The next step is to take these values and translate them into actionable decisions:
- Exclude: This is typically known as a "negative screen". You can decide to omit companies from your portfolio if they are involved in activities that contradict your values and objectives. You can exclude companies involved in controversial activities, or reduce exposure to such companies
For example, a family in the healthcare business may choose not to invest in companies that have exposure to tobacco or thermal coal.
- Promote: A more positive approach comes next. You can actively favour investments in companies that are best-in-class in areas such as labour standards, carbon emissions or governance practices versus their peers.
For example, a university endowment might specify in its investment policy that it commits to investing in companies that do not compromise the ability of future generations to meet their needs, by responsibly considering their environmental and social impacts.
Investors can choose to hold or add more of these firms to their portfolio. Institutional investors may also decide to engage directly with the management of companies that perform worst in terms of sustainability criteria and to call for improvements. If no progress is achieved by the firms in question, divestment is an option.
- Contribute: In addition to including companies that perform well in terms of sustainability, investors can choose to invest in companies that actively contribute to a better world. These firms are intentional in seeking to generate a measurable social or environmental impact alongside financial returns. This could be in areas ranging from access to finance, healthcare or education to sustainable agriculture and conservation.
Before taking the step to implement the above, it would be helpful to analyse your current portfolio, to perform a "health check" via the use of data analytics based on information from specialised sustainable data providers. Analytics help to drill down to the level of individual securities in order to understand which parts of your portfolio are already aligned with your sustainability criteria and to identify any discrepancies.
The framework for constructing a sustainable portfolio described above is just the starting point.
Sustainable portfolios are brought to life by including actual investment products across different asset classes, with weightings determined by the investor's own target financial return as well as the investor's view on how these various asset classes might perform.
The asset classes available to apply this approach span the very same asset classes of traditional investing. To achieve deeper positive impact, there are currently more opportunities in private asset classes. This will continue to evolve as the market further develops.
ASSET CLASSES INVESTORS CAN CONSIDER
- Listed equities: There are two subsets of publicly listed equities that investors can consider: those ranked highly based on environmental, social and governance (ESG) metrics, and those that actively seek to address social or environmental challenges.
Looking beyond individual securities, investors can also access this asset class through actively managed funds that can be considered after a careful due diligence process or passive low cost strategies that automatically track an index of equities designed to sustainably address topics such as climate crisis.
For example, there are asset managers such as WHEB who manage a multi-sector portfolio of global equities that take steps beyond not only integrates ESG factors but also actively invests in companies that generate positive ESG impact by identifying structural growth themes.
- Fixed income: There are two subsets of opportunities in fixed income: those that comprise of issuers that rank highly in terms of ESG metrics, and impact fixed income, i.e. green bonds, social bonds or sustainable bonds, where the proceeds of bond issues are designated for environmentally or socially sustainable initiatives.
Some financial regulators offer tax incentives, credit enhancements or grants to incentivise sustainable fixed income investing.
- Green real estate: The real estate industry offers property investors a range of green labels and sustainability certificates. Investors can also consider investing in real estate that has been upgraded with a view to reducing carbon emissions and energy consumption.
In Asia last year, the climate-neutral real estate fund managed by Credit Suisse Asset Management, which derives value from energy efficiencies and environmental standards, raised 100 million euros from our clients.
- Private equity: Private equity is at the core of impact investing because investors can achieve a deeper impact. Since the investee companies are not publicly listed - and because there is a smaller group of investors - the latter can contribute to shaping a company's strategy and work directly with it to help achieve the intended impact.
This asset class is generally illiquid and is suitable for investors with a time horizon of at least five to 10 years. The investee companies may be in the start-up phase or in a more mature phase of growth. There are a lot of opportunities in the private equity sector that investors can leverage, such as healthcare.
Countries in South and South-east Asia account for around 31 per cent of the world's population and almost 45 per cent of the world's disease burden. The healthcare sector in Asia is set for robust growth at over 12 per cent per annum over the coming decade.
Specialised healthcare investment managers such as Quadria Capital, has built a healthcare ecosystem for value creation for its portfolio companies, which enables them to get access to operators across the healthcare subsectors and access to innovative medical technology and medicine.
They believe that by harnessing these market forces, there is a compelling opportunity for the private sector to create superior investment returns while bringing efficiency to healthcare provision, delivering high quality, affordable healthcare through scalable solutions.
Sustainable and impact investing is today experiencing very rapid growth, driven by demand from institutional investors, charitable foundations and wealthy individuals - especially the younger generation.
This trend is set to continue and intensify in the coming years. The leading companies of the future will be able to successfully combine purpose and profit. They will be efficient, transparent and well governed and will be well positioned to make a lasting difference.
- Joost Bilkes is Head of Impact Advisory and Finance, Asia Pacific, Credit Suisse
- Joyce Chee is Sustainable and Impact Investing Advisor, Impact Advisory and Finance Department Asia Pacific, Credit Suisse