AIA Sustainable
Multi-Thematic Fund

Adopting sustainability requires investment and hence many perceive that companies who take sustainability seriously usually underperform. However, the reverse is true: the use of environmental, social and governance (ESG) principles by companies and investors is shown to enhance performance. This is primarily due to the ability to reduce risks as standards are raised in all three domains to combat climate change or bad corporate behaviour.

A growing body of evidence concludes that companies which are progressively more sustainable today will reap the rewards in the future – and it may even save their businesses. Oil companies, for example, are slowly changing their business models to replace fossil fuels with renewables, while car makers are switching to electric vehicles, and retailers are sourcing only from suppliers with verified human right records. Should carbon limits ever be introduced, those companies that are cutting their carbon footprints now will be better placed to deal with new regulatory or governmental regimes in the future.

Adopting SI leads to better-informed investment decisions and leads to better returns in the long term.

SI has come a long way in recent decades – though some people still think it’s only about green issues. Others believe it’s only relevant to a handful of idealists, led by pressure groups. Both myths persist because one of the origins of modern sustainability was indeed the ‘save the world’ campaigns of the 1960s. Organizations such as Friends of the Earth, founded in 1969, lobbied hard to stop some of the plainly unsustainable practices of that era, from deforestation to pollution.

However, today, the interpretation of sustainability has greatly widened, particularly in the scale by which it has been adopted as a mainstream practice by governments, corporations and investors. It now involves people from all walks of life – not just campaigners – and accounts for trillions of dollars’ worth of investment. This can be seen in the United Nation’s list of 17 Sustainable Development Goals (SDGs) which target wider issues that make life better for everyone by inviting all corporates and financial institutions to contribute towards achieving the goals within 15 years.

While the ‘E’ in ESG does indeed incorporate the green issues that investors still focus on – and now treat as a business opportunity in areas such as renewable energy – much more emphasis is now on the ‘S’ and ‘G’ than has been in the past. Social factors include trying to eradicate labour problems in supply chains, from modern-day slavery at one extreme to simply ensuring that workers are happy and therefore more productive. Better governance includes trying to encourage female participation at all levels in the workplace and having more independent directors on boards.

A persistent myth about SI is that it only includes negative screening – mainly by excluding stocks that are deemed ‘unethical’ from a fund or portfolio. However, negative screening is only one side of the coin. Investing sustainably is also reliant on positive screening, as what is put into a fund is ultimately more important than what is left out.

Many methods can be used to find the best stocks depending on the goal an investor has. Using ESG data gathered from different sources to analyse and value a company, also known as ESG integration, is often done with the aim of improving returns or reducing risks. Using both positive and negative sustainability screening techniques, along with other factors that may have a bearing on whether to buy or sell such as the principles of value investing, ESG integration enables a fully informed investment decision to be made.

Furthermore, exclusions should also be seen as a last resort. Most investors prefer to firstly engage with companies to try to find ways in which their corporate behaviour can be improved. Impact investing and active ownership often has a goal of making a difference while also creating financial return. This method is preferred because once a company is excluded, it is not possible to engage with it, and investors cannot use their influence to seek ESG enhancements.

Although Millennials show the biggest interest in SI, the interest in sustainability is spread across different generations and its roots go back centuries.

According to a 2017 questionnaire by Robeco into the taste of its Dutch retail investors, approximately 70% of people aged over 50, 66% of 34 to 50-year-olds and 67% of 18 to 34-year-olds stated clear interest in sustainability. Furthermore, 28% of the over-50s, 29% of the 34 to 50-year-olds and 26% of the 18 to 34-year-olds also invest in sustainable funds, further supporting the notion that the interest in SI is evenly spread across age brackets.

The origins of sustainability go back to the 18th century church when Quakers launched the first exclusions by refusing to invest in anything involved with the slave trade. This was then followed by several other milestones which help to propel the importance of sustainability such as the first equal rights legislation in the 1960s and the environmental campaigns of the 1970s. Subsequently, in 1995, the famous concept of “triple bottom line” was coined by a British businessman, John Elkington. This concept advocates for enterprise to consider the three Ps of ‘People, Planet, Profit’ as each of them is equally important for the long-term success of society. This concept was then adapted to become the ESG principles which now forms the bedrock of most SI processes. Therefore, SI is certainly not a modern-day Millennials hype, it has centuries of track record and is clearly at an inflection point now despite its fairly niche concept in the past.

SI is believed by many to be restricted to a handful of money managers and has no clear impact on the wider society as SI focuses only on financially material issues and not just ethical concerns. This view is partly due to the fact that SI is usually conducted by people with a vested interest such as asset management companies who own the equities or bonds of other companies. However, it is important to note that company improvements can be gained through active ownership by voting and engagement. Shareholders, including minority shareholders, who are unhappy with a company’s policies can vote against them at annual general meetings or block resolutions that do not meet their requirements. Engagement is another powerful tool where the investor meets with the company to seek improvements in one ESG field or another.

An improvement that follows engagement, voting or just happens naturally leads to better-behaved companies. A company with an exemplary ESG conduct may lead to cleaner air and reduced waste, higher wages for workers and better relations with local community, more opportunities for women and ethnic minorities as well as stronger prevention of racial and other discriminations. In short, society as a whole benefits from companies with exemplary ESG conduct.