The pandemic has offered new opportunities to institutional investors looking for financial returns in investments that are aligned with sustainable goals, but the challenge is striking a balance between the two objectives, said speakers at the Responsible Asset Owners (RAO) Global Apac event on Wednesday (Mar 23).
Contrary to beliefs that the pandemic — entering its third year — could roll back the progress on environmental, social, and governance (ESG) investments, it has actually raised awareness among investors, and more funds are being channelled into projects from climate action to gender equality, they said.
“What we want is to also recognise that climate change is not just a threat to the planet, but it could be an opportunity. In fact, it can be one of the largest opportunities for the global economy to transit into the green economy,” said HSBC Asia’s chief investment officer James Cheo, a panel speaker at the event.
“We will require almost $100 trillion of investment over the next decade to make this whole transition possible,” he said, adding the bank looked forward to being among the financiers.
Along with the pandemic, recent events such as the Russia-Ukraine crisis and spike in energy prices have accelerated the transition to a green economy as the urgency to replace fossil fuels with clean, sustainable energy sinks in.
His view is shared by Singapore’s minister for sustainability and the environment Grace Fu, who also spoke at the event.
She identified five ESG opportunities: commercially viable green hydrogen and supporting industries such as shipping; food technology; water efficiency; plastic waste disposal; and finance and carbon services.
She singled out carbon services as a huge business opportunity that will lead to significant spinoffs. “It’s going to be a new area of growth, from measuring the production of CO2 in a manufacturing setting all the way to nature-based solutions and to monitoring carbon sequestration in the natural environment.”
“I think there are tremendous opportunities for business and investments. It really depends on your risk appetite and whether you look at a half glass full or empty,” she said.
A HOLISTIC VIEW
An institutional investor that has already actively invested in ESG assets is Hesta, an Australian superannuation fund for health and community service workers.
“It does present an opportunity to invest in companies that will benefit from the transition, and Hesta does have more than $600 million or almost 1% of the portfolio invested in unlisted climate solution assets,” said Kim Farrant, its general manager for responsible investment.
She said these assets include renewable energy projects such as solar power plants and wind farms in southern Australia, and private equity investment in a battery and electric vehicle company named Gogoro, which is based in Taiwan.
But Hesta’s ESG investment strategy goes beyond just environmental considerations. “In terms of the E, S, and G issues, we don’t see them fitting into nice separate boxes. They’re complex and they are intersecting environmental, social, and governance considerations,” she said.
She added that factors such as gender equality, workplace environment, and the health and wellbeing of workers are important too, when investing in a company.
Aside from investing in environmental projects, Hesta has initiated a 40/40 vision programme that seeks to achieve balanced gender representation within the executive teams of the top 300 companies in the Australian stock exchange by 2030.
Companies that signed up are required to work towards the objective of having 40% men, 40% women, and 20% of any gender within their top executive ranks.
Farrant said Hesta uses the Impact-Weighted Accounts (IWA), a pilot collaboration with Harvard University, to measure a company’s positive and negative impacts on employees, customers, the environment, and the broader society, versus its financial health and performance.
This is one way that investors can make an informed decision when having to weigh financial returns against ESG values.
“As a superannuation fund, we have a duty to act in the best financial interests of our members. But we believe that responsible investment is entirely consistent with that obligation,” she said, adding that Hesta has a track record of having supported a range of climate-related shareholder resolutions, as well as having voted against director appointments on climate grounds.
Another useful pointer for ESG investors is to engage actively with the management and board of the companies, especially those that are stranded in industries in the transition to a green economy, such as non-coal fossil fuel energy producers, she said.
“So, for those companies that are exposed to the greatest transition risks, essentially, we're seeking to regularly update our assessment of each company's transition plan and communicate our milestones to them for action,” she said.
The Indonesia Investment Authority (INA), whose chief risk officer was also a speaker at the event, is no stranger to investment decisions that require fine balancing skills.
The Sovereign Wealth Fund (SWF) has been given the mandate to achieve optimal risk-adjusted returns on investments and contribute to the country’s developmental growth, said INA’s Marita Alisjahbana.
“This can sometimes be contradictory because development goals or ESG goals may sometimes yield lower returns,” she said.
The fact that INA is a state agency with the government as its key stakeholder can also give rise to potential conflicts of interest that its management must handle carefully.
The difference in opinions among the various stakeholders on investment directions is an ongoing affair for INA, she said, adding that the need to strike a balance is a constant challenge, but commercial viability must ultimately be the guiding principle.
“We actively discuss with our stakeholders who also understand both points of view and so that’s basically how we are moving forward,” she said.
She said INA, as a new organisation — it was formed in February 2021 — has invested in infrastructure projects such as toll roads and ports, but it has set its sights on future ESG opportunities in healthcare, education, fishery, and fintech to serve the unbanked.
“In the past year, we have integrated ESG into our investment processes. We also have a roadmap to engage with potential investee companies to create value add for our investments,” she said.