What is sustainable investment?
An investment discipline that takes into account environmental, social and corporate governance criteria to achieve long-term competitive financial returns and positive social impact. It is also referred to as “responsible investment”.
Sustainable investment is a broad term. There are many rationales, approaches and definitions. They are based on different concepts, ranging from ethical principles to the simple pursuit of better investment outcomes. There are different approaches to sustainable investing, such as active ownership (engagement and voting rights), integration of ESG factors, best-in-class approaches, thematic investing, impact investing and exclusion.
It is also called “responsible investment”.
Sustainable investing is no different from traditional “value” investing because both focus on long-term returns, according to one asset manager.
Value” investing is a strategy of selecting quality companies that appear to be trading below their intrinsic value and have the potential to perform well over the long term.
Incorporating ESG factors can help investors find such companies, said Yimei Li, managing director of China Asset Management, or ChinaAMC.
Environmental, social and governance criteria are used to measure a company’s performance in a range of areas, from carbon emissions to contribution to society and employee diversity.
“I believe investment is about finding the best long-term value. And for fundamental investors, there is nothing more important than sustainable growth,” Li told CNBC television on Thursday at the Sustainable Future Virtual Forum.
Last year, ChinaAMC, in partnership with Dutch asset manager NN Investment Partners, launched a global ESG-focused fund targeting Chinese equities. It said the fund performed well and that over the long term sustainable investments would not offer a “poor” return.
However, ESG standards need to be adapted to local conditions, Li added.
She explained that, globally, corporate governance standards usually emphasise the presence of women on company boards, but in China “it is not so difficult to achieve”.
Li said his company has its own “localised” ESG ratings to complement international standards.
No simplistic filter
Sustainable investment has become increasingly popular in recent years, but there has been criticism of this investment strategy.
One of the critical voices was Tariq Fancy, BlackRock’s first global head of sustainable investments in 2018 and 2019, who said that such investments can be a “dangerous placebo that harms the public interest”.
Loh Boon Chye, CEO of the Singapore Exchange, also acknowledged the fallacies associated with sustainable investment.
He cautioned investors against using ESG criteria as a “simplistic filter” or a “shortcut” when selecting funds and companies. Instead, investors should assess whether a company is integrating sustainability into its business model and practices, he said.
“One of the problems is that ESG or sustainability or ‘green’ is often used as an umbrella term for different strategies, sectors and investments,” said Loh, who also spoke at the virtual Sustainable Future Forum.
Companies that understand the risks associated with ESG and find ways to address them will be able to increase their long-term financial profitability, the CEO said.
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