ESG (Environmental, Social & Governance) Investing in Singapore: How Retail Investors Can Start Investing Sustainably

Seemingly overnight, Singaporeans have started to care about the environment. This could be because we’ll be one of the first places in the world to become unliveable when temperatures soar. It’s already nearly impossible to walk for more than 120 seconds under the afternoon sun without dying of heatstroke, especially with a mask on.

The government is also starting to say that they care, probably because sustainability will be a big emerging sector that the economy can profit from Hence, they’ve been rolling out initiatives like the SG Green Plan.

Turns out, being eco-friendly isn’t just about dabaoing food in your own resuable containers, but also about investing in sustainable companies and avoiding the more evil, non-eco-friendly ones.

Sovereign wealth fund Temasek Holdings has decided not to divest emitters altogether, but says they will try to invest in emitters who are committed to becoming greener. Basically, it means they’re still okay with investing in companies that harm the environment so long as they’re committed to trying to harm it less in the future.

What about us, as retail investors? Can we also adopt an ESG (Environmental, Social & Governance) investing framework for our own portfolio without going broke?

What does ESG stand for?

Environmental, Social and Governance (ESG) refers to non-financial factors that we can use to evaluate a company or guide our financial decisions.

Traditionally, financial decisions have been based entirely on profitability or utility. For example, it is profitable for businesses to manufacture their products in developing countries with cheaper and less regulated manufacturing processes, even if it means polluting more and exploiting workers.

ESG metrics try to measure how socially responsible a company is. Based on ESG metrics, investors can avoid putting their money in companies that wilfully destroy the planet, exploit child labourers in impoverished countries and so on.

What does ESG investing mean?

ESG investing takes into account the broader impact of businesses on the world when evaluating investment risks and opportunities.

As an ESG investor, you are trying to invest in companies that have an impact that is positive or at least acceptable, while at the same time creating value for yourself as an investor.

For instance, a petroleum company operating on an enormous scale today might be at risk in the future as governments try to become less reliant on fossil fuels. On the other hand, green or sustainable sectors like the renewable energy industry have enormous room for growth.

What are the key ESG metrics?

You can’t evaluate a company in terms of ESG just based on good feelings and moral smugness.

The financial industry has come up with some ESG metrics to evaluate companies. This looks a lot like conventional financial analysis, except that non-financial data like emissions data is used.

Here are some of the key metrics relating to the environment:

• Amount and intensity of greenhouse gas emissions
• Amount and intensity of energy used
• Amount and intensity of waste generated
• Percentage of product made from recycled materials
• Percentage of product that is recyclable or compostable

There also also metrics relating to the S and the G in ESG, ie. Social and Governance. These include things like employee turnover rate and percentage of revenue derived from countries with a high level of corruption

The trouble with ESG metrics is that it’s difficult to quantify in exact terms their effects on the company’s balance sheet.

But at the same time, it is undeniable that climate change will have an impact on businesses and industries. So, it’s still useful to have some way, however imperfect, to measure this impact than to pretend it doesn’t exist.

Can ESG investing be profitable?

Hardcore capitalists think ESG investing is a moral rather than profitable practice. But this ignores the fact that in the short-term there can be good and best investments in every sector, no matter how sustainable or unsustainable. In other words, the ethical dimension of ESG investing doesn’t mean that such investments cannot be profitable.

In a 2021 poll of frequent investors in the US, 69% said they found ESG investing very or somewhat profitable, with only 15% saying sustainable investing was not too profitable or not profitable at all. As expected, younger investors tend to view ESG investing as more profitable as opposed to older ones.

In Singapore, there was a report last year about how the top five ESG stocks did better than the five strongest STI blue chip stocks.

The key is to not just invest in companies that you think are saintly and sustainable, but to evaluate them from a financial and business perspective at the same time, and to look out for growth opportunities. The electric vehicle industry, for instance, is one that ticks all the right boxes.

In other words, rather than thinking of a good ESG score as a trade-off for growth, you’re trying to find a win-win solution. The best outcome is to invest in sustainable businesses that not only have a positive impact but growth potential as well.

Top examples of ESG investments

To give you an idea of the kinds of companies you might want to research, here are some highly-rated ESG stocks on SGX that have been doing well on the market, too.

• DBS
• Mapletree Logistics Trust
• Sembcorp Industries
• Sheng Siong Group
• Singapore Exchange

You can check out more ESG ratings on SGX stocks here.

3 easiest ways to start ESG investing

Don’t want to have to go down that rabbit hole of researching individual stocks? Here are some quick and easy ways to get started with ESG investing.

a) Buy ESG ETFs

ETFs are a quick and dirty way to get exposure to top stock picks.

• iShares ESG MSCI USA Leaders ETF
• iShares MSCI KLD 400 Social ETF
• iShares MSCI Global Impact ETF
• Xtrackers MSCI USA ESG Leaders Equity ETF
• Vanguard ESG International Stock ETF
• Vanguard ESG US Stock ETF
• SDPR S&P 500 ESG ETF

b) Use a robo advisor with an ESG theme

Robo advisors are the ultimate in no-brains investing, and as luck would have it, Endowus has an ESG portfolio that lets you invest your cash, CPF and SRS funds in companies with a good ESG rating.

c) Buy ESG funds

Another way to get exposure to ESG funds is to buy unit trusts. Here are some examples:

• Allianz Global Sustainability Fund
• BNP Paribas Aqua
• United Sustainable Credit Income

Don’t feel the need to revamp your entire portfolio overnight. Just be aware that evaluating your investments according to ESG principles can be one way to judge the impact of the businesses you invest in. In the long run, businesses with strong ESG scores are more likely to be sustainable, both in a financial and environmental/ethical sense.