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With sustainable investing on the rise, experts warn of greenwashing risks

With sustainable investing on the rise, experts warn of greenwashing risks
A recent report published by a UK think tank studied more than 700 "green" equity funds and accused many of falling short of global sustainability targets. (Photo: iStock)

SINGAPORE: Three months ago, Ms Wendy Lim invested S$10,000 into a US-listed exchange-traded fund that focused on companies involved in clean energy and conservation.

The possibility of good returns, coupled with lower risks, was the reason she decided to sink her money into this, said the 34-year-old, who has been investing as part of her retirement planning.

Plus, the energy sector holds growth potential and seems less volatile compared to the disruption-prone technology space, she said.

But Ms Lim also wondered if she could make her money work for a greater good.

“I have always been following climate change (issues). Since I’m intending to invest, I might as well invest in a good cause.

“I do believe that sustainable energy is our future, just like technology. The earth has finite resources and it’s only a matter of time that all countries and industries need to make the change.”

Ms Lim is among a burgeoning group of retail investors looking at growing their cash by investing in companies that focus on environmental, social and governance (ESG) aspects.

The environmental aspect evaluates how a firm uses its resources and limits its impact on the environment. The social front considers labour practices – work conditions, and employment and wage equality – as well as policies towards its suppliers, customers and communities. Governance assesses leadership diversity, business ethics and reputational issues, and even exposure to bribery.

A recent poll by Swiss bank UBS showed that around 90 per cent of respondents in Singapore want to have investments that align with their values, be it for social or sustainable causes. Nearly 70 per cent also said they were more interested in investing sustainably now than before the pandemic.

Another consumer study by local lender UOB found that 90 per cent of Singaporeans were keen to find out more about sustainable investing. Of those surveyed, 13 per cent had already made such investments.

DBS said it has seen a steady increase in investments into its two sustainability-themed funds, with fund purchases as of end-September nearly three times higher compared with January. Investors were mostly between 35 and 55 years old.

Given the strong demand, DBS’ head of financial planning, investment and insurance solutions Evy Wee told CNA that the bank plans to bring in more sustainability-themed investment products for customers next year.

Robo-adviser Syfe, which allows clients to choose from five thematic investment portfolios, said that “ESG and clean energy” has been the most popular option, accounting for 40 per cent of the thematic portfolios created so far.

WHAT’S DRIVING DEMAND?

To be sure, sustainable investing is not entirely new.

The term ESG was officially coined by the United Nations in 2004. Before that, the idea of investing with a socially responsible goal had been around as early as the 1960s, spurred by political causes such as the civil rights movement in the US and the development of “sin” industries like tobacco production.

But the trend picked up momentum globally over the past two years amid growing awareness about climate change and sustainability issues, experts said.

The prolonged pandemic, whose impact has caused mindset and value shifts among people, is another reason fuelling more to invest with a conscience.

Investors, particularly the younger ones, are concerned with issues like climate change, said Mr Elson Goh, head of Asia portfolio management at St James’s Place Wealth Management. 

“COVID-19 has been a pandemic that has struck the world and that has probably (made people) realise that there are other areas which can have a drastic impact on our lives,” he said.

ESG investing has also gained ground because more realise that it is “directly related to business-critical issues” such as board accountability. These, in turn, can affect a company’s reputation and stock valuation, said Syfe’s partner and vice-president of distribution Sebastian Sieber. 

Some misconceptions about ESG investing include how it entails a compromise on returns. But data has suggested otherwise, industry players said.

DBS pointed to the one-year performance of its sustainability-themed funds, which has been “healthy” at around 30 per cent.

It also cited a 2018 study by Morgan Stanley’s Institute for Sustainable Investing which found that sustainable funds generated returns that are in line with comparable traditional funds, while reducing downside risks. In addition, there was “strong statistical evidence” that showed such funds being more stable during times of extreme volatility, said Ms Wee.

Over at Syfe, the five-year performance of its “ESG and clean energy” portfolio is currently at 23.4 per cent. This outpaces the annualised performance of the S&P 500 index over the same period, which stands at 18.9 per cent as of end-October, said Mr Sieber.

“(Our) portfolio allows investors to tap into significant growth potential tied to the growing importance of ESG factors among companies, as well as the growing importance and urgency of combating climate change,” he added.

Mr Goh said companies with highly rated ESG practices would do better than their peers over time, given how they will have “better ways” of dealing with issues ranging from boardroom diversity to withstanding the impact of changing weather patterns.

“That leads to better decision outcomes within the company, which also means that they are better quality companies in general,” he told CNA.

THE RISK OF “GREENWASHING”

But with more looking to invest sustainably, experts warn that there could be a growing risk of so-called “greenwashing” – the act of making false or misleading claims about the environmental merits of a product, service or technology.

UK climate change think tank InfluenceMap studied 723 equity funds specifically marketed using ESG- and climate-related keywords like low carbon, and had more than US$330 billion in total net assets.

More than half of these funds fell short of global sustainability targets laid out in the Paris Agreement, it said.

Adopted in 2015, the Paris treaty calls on countries to reduce emissions in order to limit global warming to well below 2 degrees Celsius – and preferably to 1.5 degrees Celsius – above pre-industrial levels so as to curb the worst consequences of climate change.

More than 70 per cent of funds with broader ESG goals were also misaligned with the Paris Agreement’s global climate targets, according to InfluenceMap.

It added that investors may not be able to determine if funds are really what they claim to be, given the wide spectrum of terms used to describe green funds and a lack of transparency when it comes to marketing, the Financial Times reported.

Experts that CNA spoke to also cited the absence of standardised ESG regulations and benchmarks to measure fund performance.

This could make it easy to "greenwash" ESG funds, said Mr Armin Choksey, who leads PwC Singapore’s Asia-Pacific asset and wealth management market research centre.

He added that such funds tend to have confusing and overlapping terminology, as well as generic names like “socially conscious”.

Professor Sumit Agarwal from the National University of Singapore’s Business School pointed out the risk that comes with the lack of a standardised measurement to calculate companies’ green or sustainability score.

“If (the company) claims on their balance sheet or quarterly statement that they are investing in green technology or they are doing some efforts towards sustainability, they might be called ‘green’, but we are really not looking at public data, private data and understanding how green they are,” he said.

“We just have to take their word for it."

TAKING ACTION

Mr Choksey said the development of standardised regulations and labelling guidelines for funds would help ensure retail investors are better informed about ESG investments and the associated risks.

Steps are already being taken in the region. In Hong Kong, the Securities and Futures Commission maintains a central database of all authorised ESG funds and allows access to this database through its website.

Earlier this year, the Financial Supervisory Commission in Taiwan laid out its first set of formal criteria and disclosure requirements for onshore funds claiming an ESG label.

Back home, the Singapore Exchange will start requiring companies to provide climate reporting on a "comply or explain" basis in their sustainability reports from financial year 2022.

Climate reporting will become mandatory for issuers in the financial, agriculture, food and forest products, as well as energy industries from the financial year 2023. Those in the materials and buildings sector and transportation industries will have to comply from 2024.

The Monetary Authority of Singapore has said it will announce new disclosure standards for retail funds in Singapore with an ESG investment objective by early next year.

The goal is to help investors better understand the criteria that an ESG fund uses to select investments and be able to obtain more information on the investment process.

Other efforts are also under way, such as the establishment of a new Sustainable and Green Finance Institute by the National University of Singapore to drive green finance education and research.

Apart from developing policy recommendations for regulators, it will also build a sustainability and green scorecard for businesses in Asia that is “transparent” by using modern statistical and advanced machine learning tools, said Prof Agarwal, who is part of the team helming the new institute.

The latter is likely to take three to four years.

Firms in some Asian countries are "big culprits" of greenwashing and duping investors, he said.

With a measurement that is transparent, "we can hold them more accountable, and then the investor will make more informed decisions”.

How to start investing sustainably

UNDERSTAND WHAT’S ESG

Knowledge is key, so find out what sustainable investing is all about before putting dollars behind it.

For a start, read the sustainability reports issued by companies you are investing in, said Securities Investors Association Singapore founder David Gerald.

There are also several misconceptions surrounding ESG, such as how it is a mere “passing fad”. Some investors also see ESG as a new asset class but it serves more as an approach to investing.

“Effective sustainable investing should use traditional financial analysis, along with ESG factors, to arrive at investment decisions,” said Ms Evy Wee from DBS.

UNDERSTAND YOURSELF

Just because the world is moving towards ESG investing does not mean it is risk-free. Always invest based on your risk appetite, investment horizons and goals, said Mr Gerald.

Syfe’s Mr Sieber advised investors to decide what matters most to them, given how there are three metrics within ESG and each having “wide-ranging” definitions.

“Find what aligns with your beliefs and your values before investing,” he said. “Is it environmental factors or are you most concerned about issues (about) corporate governance such as executive pay?”

UNDERSTAND THE STRATEGIES

Picking the right investment strategy is also crucial.

“You will need to consider methods of diversification and management of your investment portfolio, which will vary over time depending on market direction,” said Mr Gerald, noting that these include considering new entry or exit strategies to take profit or cut losses.

Don't over-invest in one company or investment product, he added.

ETFs, according to Mr Sieber, is an efficient way for investors to spread their risks across companies, sectors and geographies.

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Source: CNA/sk(cy)

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