SG Has A Green Plan, Do You?
No challenge poses a greater threat to future generations than climate change
In his 2021 Budget statement, Deputy Prime Minister and Minister for Finance Heng Swee Keat outlined the Singapore Green Plan, a national movement and whole-of-society effort to build a sustainable Singapore for all generations. The green plan aims to collectively bring together both public and private sectors to push forward with the national agenda of sustainable development.
However, sustainability goes beyond reduce, reuse, and recycle. There has been a greater awareness amongst investors over the past few years seeking sustainable investment opportunities. For an investor who seeks to hold a portfolio that reflects their commitment to sustainability, there is a way to gain access to sustainability-focused investment strategies using scientific research and sound investment principles.
We all want to ensure that our investments provide us the best returns with the highest probability of success. But is it possible for investors to focus on sustainability and still have a good investment experience? For instance, wouldn’t it be great to reduce a portfolio’s exposure to greenhouse gas emissions while maintaining broad diversification and a focus on higher expected returns?
Using Evidence-Based Investing (EBI) partners as building blocks for portfolios, we can incorporate insights from climate science to determine which environmental criteria are foundational in sustainability strategies. Environmental science guides us to focus on climate change, identifying greenhouse gas emissions as its most significant driver. An investment strategy can be built to focus on climate change and greenhouse gas emissions in order to achieve measurable environmental sustainability outcomes, all while maintaining a robust investment framework.
EBI principles show us that the way to achieve higher returns from your portfolio in the long-term is to broadly diversify and incorporate academically proven drivers of return. In equity allocations, this means a greater focus on securities with smaller market capitalisations, lower relative prices, and higher profitability. For bond strategies, information observed from yield curves is used to pursue higher expected returns across bonds of varying duration, credit quality, and currencies of issuance.
At the moment we use one sustainable EBI fund for some portfolios (with more to come later in the year). The manager evaluates companies using a patented emissions-focused sustainability scoring system that enables them to compare companies based on targeted environmental issues. The process is shown below.
For instance, if the objective is to reduce a portfolio’s exposure to greenhouse gas emissions and potential emissions from fossil fuel reserves, the worst offenders across all industries may be de-emphasized or excluded from the portfolio altogether. An across-industry comparison provides an efficient way to significantly reduce the aggregate greenhouse gas emissions produced by portfolio companies. The approach also rates portfolio companies on sustainability considerations relative to peers, emphasizing industry leaders with better environmental profiles and underweighting or excluding sustainability laggards. A look at a representative investment portfolio shows that such an approach leads to a clear and verifiable decrease in emissions without sacrificing on the factors that drive investment returns.
Contrary to expectations, investing well and incorporating ethical values around the environment need not be mutually exclusive. With a robust investment framework overlaid with the considerations that represent the views of sustainability-minded investors, a cost-effective approach can be built to provide investors with the ability to pursue their sustainability goals without compromising on sound investment principles or expected returns.
Such sustainability strategies are already available in our VaR portfolios with more ESG focused investments slated for the second half of 2021.
