This stands for Environmental, Social and Governance - the three factors that have become increasingly important in recent years. In order to adopt these factors into your investment approach, it is important to understand what they mean and how they contribute as part of an investment portfolio.
An increased focus on responsible investing has been driven primarily by climate change, increased demand from investors and most recently, new regulatory and disclosure requirements. Responsible investment essentially refers to the overarching framework that can be used to embrace ESG factors as part of an investment portfolio.
There is a growing recognition that ESG factors have the potential to enhance investment returns and manage risk better. This is because companies with a track record for good ESG performance tend to be associated with better management of risks and opportunities, giving them a better outlook for long-term sustainability.
Integrating ESG factors into the investment process effectively identifies risks and creates more opportunities for investors. This is now being validated by recent studies that show a positive correlation between good ESG ratings and wider company performance. Companies with a strong ESG rating tend to outperform their competitors whilst being less exposed to systematic risks - and thus more resilient to shocks.
The significant economic and societal impacts of the Covid-19 pandemic have driven even more commitment from companies and governments to move towards a sustainable future, bringing sustainable investment considerations to the forefront as part of any investment discussion. To be fair, the sustainability community has always considered the risks that an event such as a global pandemic could lead to major systemic interruptions. Now, with first-hand experience, mainstream investors have also started to look at this more closely, putting responsible investing firmly on the agenda.
Investor expectations will inevitably continue to evolve. Nowadays, there is more recognition that considering ESG factors to preserve capital and deliver sustainable growth, whilst enabling the transition to a sustainable global economy, will increasingly affect the value of all investments. In parallel, this is being fuelled by an increasing number of available strategies that are aimed at generating financial returns alongside positive social or environmental outcomes. Therefore, ESG considerations are fast becoming critical to making sound investment decisions.
Traditional finance, which is fundamentally driven by optimal financial return vs risk characteristics, still amounts to the majority of global investments. In this regard, it might be worth exploring your options to build more diversified - and hence more resilient - investment portfolios through adding sustainably invested instruments. Responsible investment considers Social, Governance and Environmental returns complementing traditional finance, so reaching out to your trusted Financial Adviser to assist you with your investment needs and your portfolio construction will help in this quest.
As outlined in this article, a variety of forces and factors are aligning towards the ultimate goal of making sustainable investing not just the preference but the norm, contributing to the long term benefit of investors and communities alike. If you are interested in learning more about sustainable investments and ESG, please visit our Investment Academy.
This article was written by Konrad Borg Myatt, CEO of HSBC Global Asset Management (Malta) Ltd. It first appeared in the Times of Malta on 26 July 2021.