Environmental, Social and Governance (ESG) investing in Singapore: The what, why and hows behind sustainable investing

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The word has been changing a lot lately. Climate change has become an ever-increasing concern for the younger generation of millennials and generation Z.

According to a study conducted in 2021 by the World Wide Fund for Nature Singapore and Accenture, four out of five Singaporeans say they care about the environment; 29 per cent of respondents would “buy more sustainable products if they had more information about their purchases’ impact on sustainability.“

The fad of sustainable consumption has also spilt over to the investing world, as investors want to pump their money into the companies that align with their value of caring for the environment.

Interestingly in the same 2021 study mentioned above, three-quarters of respondents “want to behave more sustainably, but worry they lack avenues and options to do so”. Environmental, Social, and Governance (ESG) Investing can serve as an avenue for many of these people.

In this article, we will be discussing everything you need to know about ESG investing and how you can get started on your journey towards sustainable investing and contributing to a better world.

What is Environmental, Social, & Governance (ESG) investing?

What is ESG to begin with? For starters, ESG stands for Environmental, Social, and Governance. The Nov 2019 McKinsey Quarterly Report regarding ESG summarises the different aspects of ESG exceptionally well:

The Environmental portion of ESG is how the company deals with the environment. Such as how much energy and resources they use, how much waste (from carbon emissions to pollution) they produce, and how they treat the ecosystem around them.

The Social portion addresses the interplay between the company and their relevant stakeholders. Stakeholders are parties that have a form of involvement with the company.

They include employees, or labour, investors, consumers, and the people residing in an environment of interest to the company. Calculating the social criteria includes how diverse and inclusive the company is to all stakeholders.

The Governance Portion tells you how the company structures and governs itself to make effective decisions, comply with the law, and meet stakeholder expectations. Such as their internal system of practices, controls, and procedures.

Why do people invest in ESG companies

There seems to be an increasing trend for people to become more hyper aware of the ever growing environmental and social issues that are plaguing societies; this is due to better education provided on shedding awareness on environmental and social problems over the years and the rise of the internet and social media enabling more people to champion their advocacy behind environmental and social causes.

From the 20th to the 21st century, there has been a paradigm shift from the Shareholder Theory coined by Milton Friedman, which emphasises profit-building to meet shareholders' needs, to a concept called the Stakeholder Theory, coined by Edward Freeman, which emphasises meeting the needs of every party involved with the company.

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Stakeholders include customers, suppliers, employees, investors, communities and others who stake in the organisation.

Recent scandals and frauds in huge corporations have resulted in more investors being wary about how the corporation governs itself and implements proper audits, checks and balances to keep the company running smoothly in the long run.

Governments are also playing a massive role in educating the public about environmental sustainability and imposing regulations and restrictions on companies regarding labour laws and carbon emissions.

It is more cost-effective for companies to change their procedures and consumption processes than to be penalised by the country's government they wish to operate. Some sovereign funds have invested in companies pledging sustainability.

Companies are also aware of the shifting consumer behaviour towards brands that are more environmentally friendly, as well as endorsing diversity and inclusion. They also do not want to deal with the pesky regulations imposed on them by the jurisdictions that they operate within.

The pull factor of capturing more demand from an ever-increasing environmentally and socially consumers, as well as the push factor of cutting costs by being more sustainable (since switching to sustainable options for energy consumption is cost-effective in the long run), has resulted in more companies becoming more ESG friendly, which sets a role model for other corporations to follow and capture the trend.

Pros & cons of ESG investing

Just as there are advantages in ESG investing, there are also crucial things to note that you have to be fully aware of before investing sustainably.

Benefits

There are strong reasons behind investing in companies that prioritise ESG.

Firstly, as mentioned above, more and more consumers buy items from brands that put effort into their sustainability mission. Governments also tend to reward corporations compliant with ESG and punish companies that don’t, making ESG investing a safe bet in the long run.

Investing in an ethical business can also cause less cognitive dissonance within you as your values align with the company you invest in.

It is proven that an ethical company will sustain and grow well into the far future as employee retention boosts (since people do not want to associate themselves working in an unethical company), consumers purchase more, and investors become more confident in the financial reports.

Setbacks

Despite the potential benefits of ESG investing, it is all dependent on the company's commitment to pushing its entire model to prioritise ESG. Some companies only pay lip service to the ESG cause to appease customers.

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Many customers who do not find authenticity behind the company’s decision due to inconsistency in their message and actions will boycott them, resulting in a backfire.

Therefore it is essential to do your research on the company’s mission statement and efforts to see if they align with your values and if they align with what they promise.

ESG investing is also a long-term process, as companies have to pour in massive investments and effort into switching their entire process to be more compliant with ESG goals. They tend to be more vulnerable to short-term volatility and market sentiment.

ESG investing is still a new trend, and therefore there is a limited amount of platforms and retail funds you can invest in.

The McKinsey 2019 Report summarises the pros and cons of ESG as shown below:

PHOTO: Nov 2019 McKinsey Quarterly Report

How can you get started on investing in sustainable companies

Now that you understand better about ESG investing, how do you get started on your journey? Well, there are a few brokerages in Singapore that allow you to invest in ESG companies.

Tiger Brokers

Promo: Enjoy 180 Days unlimited commission-free trades for U.S. stocks and more when you sign up

Consider this if you are looking for a broker committed to ESG cause. 

Tiger Broker trading fee.
PHOTO: Screengrab/ValueChampion
Investing products by country.
​​​​​​PHOTO: Screengrab/ValueChampion

Analyst's review

In 2021, Tiger Brokers served as the underwriter for ATRenew Inc to launch on the New York Stock Exchange (NYSE), making it China’s first ESG stock to do so. Tiger Brokers also provide a huge varieties of companies in the US and Singapore market that commit to the ESG cause that you can trade with.

Endowus

Consider this if you want to invest in an ESG fund with a robo-advisor.

  • Minimum Investment
    • $1,000
  • MAS Licence
    • Financial Advisor License
Summary of Endowus annual management fees.
PHOTO: Screengrab/ValueChampion

Analyst's review

Endowus is a Robo-advisor committed to providing diversified ESG funds as part of their already diverse portfolio. You can now access Endowus ESG portfolios built with the best sustainable and climate equities and fixed income funds from one of the top ESG fund managers at a low cost.

Interactive Brokers

Consider this if you want a broker with ESG user interface. 

Fee comparison: Interactive Brokers & Saxo Markets fee comparison.
PHOTO: Screengrab/ValueChampion

Analyst's review

Interactive Brokers have taken a huge step in developing tools for investors to engage in ESG, such as tools include the Impact Dashboard, which identifies what you value and how important it is for a company to align with it, as well as an ESG score that allows you to compare and receive news about a company’s plan to sustainability.

Conclusion

To reiterate, three-quarters of Singaporeans do not know where to start, as they “worry they lack the avenue or resources to do so”.

They think that investing in a sustainable company might not be easy, and research on sustainable brands to buy and consume and be time-consuming.

But as long as you are willing to start somewhere, you have made the first step in making the world a better place.

This article was first published in ValueChampion.