SINGAPORE - If you could make an investment decision to penalise palm oil companies responsible for the recent severe haze, wouldn't you jump at the chance?
Incidents like that could sway socially conscious investors on how and where they can plough their investment dollars.
More companies are realising that how they measure on the social, environment and governance scorecards has an impact on the prices of their stocks and bonds.
It's a trend that is picking up fast.
Investors now demand companies consider a broader spectrum of risks in areas such as labour rights protection and environment management, said Mr Alex Friedman, UBS Wealth Management's global chief investment officer. Companies that fail to do so could see their credibility and trust being eroded, he added.
In a new UBS report entitled Sustainable Investing - Can Values Add Value?, Mr Friedman cited the examples of allegations of child labour in an Indonesian factory, an oil spill in the Gulf of Mexico and unfavourable media coverage on job offshoring, and how they had a devastating impact on the stock prices of the companies involved.
"Stock prices can take years to recover," he said.
The global financial crisis that had exposed governance lapses in companies has led investors to shift their focus from a short-term to a longer-term horizon.
A growing number of corporations are adjusting to these new realities.
"From an investment standpoint, the timing of this shift is serendipitous," said Mr Friedman, who oversees some US$1.7 trillion (S$2.1 trillion) in assets and heads a team of 900 analysts worldwide.
Q: What is sustainable investing?
Mr Friedman: Sustainable investing incorporates environmental, social and governance (ESG) factors while making investing decisions.
Synthesising material environmental, social and governance factors together with other traditional fundamental data in the investment analysis has the potential to yield better performance.
With the increasingly available ESG-related data, investors need tools to help them deal with the difficult job of seeing the forest for the trees.
Fortunately, common reporting and accounting standards are emerging.
The size of the sustainable investing markets is estimated at US$13.6 trillion globally, according to a 2012 review by the Global Sustainable Investment Alliance.
Q: What are the benefits?
Considering sustainability factors in investing redirects capital to reward certain companies and penalise others.
This also has a positive impact on society. Looking for firms with better risk management can yield more stable returns in a portfolio.
Firms that focus on delivering value to stakeholders - not maximising profitability at the expense of everything else - are likely to be less susceptible to volatile ups and downs.
There is evidence to show that companies with higher sustainability scores can and do generate better financial performance as they lower their cost of capital and improve funding access.
Q: How can I build a portfolio investing in these companies?
A comprehensive approach is to evaluate ESG risks within each asset class to ensure consistency.
Why evaluate only metals and mining equities on human rights considerations when offending firms also appear in the other asset classes like fixed income or commodities?
Each client's motivation is different. For example, performance-oriented investors may seek higher allocation to private equity to take advantage of specific ESG opportunities not available in public markets.
Values-based investors may not want to invest in commodities and hedge funds.
Ultimately, the decision is about better risk-adjusted returns in all asset classes while also reflecting investors' values.
Q: What are some of the sustainable investment themes?
Some of the more readily investible and compelling long-term themes include food availability and access to nutrition, obesity and related medical conditions, renewable energy and energy efficiency and water management.
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