Sustainable investing, the new imperative

“Sustainability is no longer about doing less harm. It’s about doing more good.”

Jochen Zeitz

You’ll struggle to find a major company these days that’s not working overtime on its ‘sustainability journey’. Yet this can be a tricky path with its own pitfalls. Being called out for ‘greenwashing’ is often worse than being criticised for doing too little or engaging in environmentally-questionable activities.

Asset managers feel especially under scrutiny from a whole range of sustainability-minded stakeholders. ESG considerations are now high on the agenda for most funds with some managers dialling down their communications for fear of becoming entangled in controversy. Increasingly funds will be judged by their carbon footprint as well as their financial performance, particularly by large institutional investors who are themselves under the spotlight.

More accountability, more transparency

Here in Asia, Hong Kong’s Security and Future’s Commission (SFC) has turned up the heat by creating a new regime for Climate-related Risk Management and Disclosure – and amending its Fund Manager Code of Conduct (FMCC). In summary, this requires managers of major funds to be more transparent and proactive in communicating the environmental impact of their investment decisions.

This trend towards greater disclosure and accountability will only continue and asset managers must become more proactive to avoid negative and potentially damaging outcomes. Expect the unexpected. Russia’s ‘surprise’ invasion of Ukraine vividly illustrates how quickly the landscape can shift. Pity the poor fund manager who had loaded up on Russian energy stocks only to suffer reputational as well as monetary loss.

Walking the walk

Making airy pledges about sustainability or delegating ESG to a mid-level staff member won’t cut it. Credible ESG requires commitment, honesty and getting the entire team fully engaged. Funds and asset management companies must put rigorous processes in place, set clear targets, and regularly audit the climate and social impacts of their investments, ideally using internationally-recognised frameworks and methodologies.

ESG considerations are especially relevant when investing in Asia. The region’s extraordinary economic growth has massively expanded its carbon footprint. Deforestation, biodiversity loss, water pollution, environmental degradation, and labour rights & worker exploitation are all areas of key concern as countries rapidly move up the value chain. Ripe investment opportunities often come with major ESG risks that will mean putting profit before planet.

Funds who fully commit to sustainable and ethical investing will have a clear advantage in the coming years. Conversely, the costs for those who get it wrong will become increasingly high.

Look out for our follow-up article where we discuss how to develop your ESG proposition, then clearly communicate it to key stakeholders.