With environmental, social and governance (ESG) factors growing increasingly important, it is crucial for investors to understand this concept and what this means for their investment approach.
The increased focus on responsible investing has been driven mainly by climate change, increased investor demand and, most recently, new regulatory and disclosure requirements. In essence, responsible investment refers to the overarching framework for embracing ESG factors as part of an investment portfolio.
There is a growing recognition that ESG factors can enhance investment returns and manage risk better. This is because companies with good ESG performance tend to have better management of risks and opportunities, and hence the advantage of long-term sustainability. Integrating ESG factors into the process of investing effectively identifies risks, and creates opportunities for investors. This is now being evidenced through recent studies showing that company performance and good ESG ratings are positively correlated. Companies with strong ESG ratings tend to outperform while being less exposed to systematic risks – and, therefore, more resilient to shocks.
Given the economic and societal impacts from COVID-19, the pandemic has propelled even more commitment to move towards a more sustainable future, bringing to the forefront sustainable investment considerations as part of any investment discussion. To be fair, the sustainability community has always considered the risks, like a pandemic, that could lead to systemic interruptions. Now, with first-hand experience, mainstream investors have also started to look at this more closely, putting responsible investing firmly on the agenda.
While this is the main way with which each and every investor can assist in achieving a more sustainable future, investor expectations will inevitably continue to evolve. Nowadays, there is more recognition that considering ESG factors to preserve capital and deliver sustainable growth, while enabling the transition to a sustainable global economy, will increasingly affect the value of all investments. In parallel, this is being fuelled by an increasing number of available strategies that are aimed at generating financial returns alongside positive social or environmental outcomes. Therefore, ESG considerations are fast becoming critical to making sound investment decisions.
Traditional finance, which is fundamentally driven by optimal financial return versus risk characteristics, still amounts to the majority of global investments. In this regard, it might be worth to start looking at building more diversified and hence more resilient investment portfolios through adding sustainably invested instruments. Responsible investment considers social, governance and environmental returns complementing traditional finance, so reaching out to your trusted financial adviser to assist you with your investment needs and your portfolio construction will help in this quest.
As outlined above, a wide variety of forces and factors are aligning towards the ultimate goal of making sustainable investing not just the preference but the norm, contributing to the long-term benefit of investors and communities alike.
If you are interested in learning more about sustainable investments and ESG, visit HSBC’s Investment Academy: www.assetmanagement.hsbc.com.mt/en/individual-investor/investor-resources/investment-academy.
Konrad Borg Myatt, CEO, HSBC Global Asset Management (Malta) Ltd