THE rabbit is a well-loved creature, often symbolising intuition and associated with springtime and new beginnings.
Since it’s the Year of the Rabbit, I wanted to share three practical tips we can learn from rabbits when it comes to sustainable investing, and why ESG (environmental, social and governance) is not just about intuition, but also about the consideration of tangible risks and opportunities in order for your portfolio to blossom well beyond spring.
Rabbit’s vision
It is hard to ambush a rabbit as its vision covers nearly 360 degrees, which allows it to see what’s coming from behind and above it, and from the sides without turning its head.
Considering sustainability trends such as the move to a net-zero world and the opportunities presented by the United Nations Sustainable Development Goals will help investors capitalise on long-term structural trends for their portfolios.
For example, the Chinese government launched the National Green Development Fund, a state-run private equity fund worth 88.5 billion yuan (S$17.2 billion), focusing on investing in green projects and firms. Analyses on emerging markets and China equities by the United Nations Principles for Responsible Investing also suggest that portfolios with superior ESG characteristics are able to deliver alpha. ESG factors’ alpha-generation capability in China equities is found to be higher than that of the broad emerging markets.
Green capex (capital expenditure) remains a multi-year secular theme, which we expect will drive the next wave of infrastructure investments as the world decarbonises. Penetration rate for electric vehicles also continues to grow, with strong adoption in mainland China and Europe, while US manufacturers stand to benefit from the Inflation Reduction Act.
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Rabbit ears and risk management
ESG factors are like rabbits’ ears; they help your portfolios better manage risks. Rabbits can rotate their ears 270 degrees, allowing them to detect any threats that might be approaching from over three kilometres away in all directions. Since rabbits are prey animals, this plays a very important role in helping them stay alive and evade predators.
Similarly, industry research has shown that better management of ESG issues such as carbon emissions and corporate governance can result in lower costs of capital and a lower risk premium. Research has found that companies with more negative ESG incidents underperform the broader market by between 2.5 and 3.5 per cent a year .
Rabbit varieties
Just as there are many varieties of rabbits, there are many types of sustainable funds. Rabbits come in all shapes and sizes. The smallest rabbit is only 0.2 m in length and 0.4 kg in weight, while the largest rabbit in the Guinness World Record stands at more than 1.3 m and weighs around 22 kg.
Similarly, there are different approaches to sustainable investing. You may, for instance, choose to exclude certain sectors from your investments, or look at integrating ESG factors to better manage risk or capture opportunities with sustainable themes.
Given the many different approaches, it is important for investors to think about what their investment objectives and expectations are, and to ask for transparency when presented with solutions.
For our high-conviction suite of sustainable funds, we conduct due diligence on the breadth and depth of ESG integration, the proportion of holdings within the fund that is aligned with the sustainable theme highlighted, and the depth of sustainability expertise within the fund manager’s investment teams. This is part of our efforts to mitigate greenwashing.
Our annual investor study reveals that more than 90 per cent of investors across Asia, the Middle East and Africa want to allocate funds into sustainable investments. This could translate into US$8.2 trillion of potential assets under management in sustainable investments by 2030. However, some barriers, such as the concern over greenwashing, have to be addressed to unlock the potential and help investors benefit from sustainable investing.
The writer is global head for sustainable finance, consumer, private and business banking, Standard Chartered Bank.
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