Ethical Investing: Making Money by Doing Good
Discover how sustainable investing can benefit communities and also produce strong returns for wealthy individuals keen to make a difference
An era of rising social and environmental awareness and a proven track record of strong financial returns have pushed sustainable investments into the mainstream of asset management.
At the end of 2013, about US$44.9 billion of assets worldwide were managed using at least some sustainability- or ethically-linked strategy, according to the latest annual report of the Association for Sustainable and Responsible Investment in Asia (ASRIA). The association calculated that the dollar value of assets managed sustainably in Hong Kong grew by 22 per cent between 2012 and 2013.
“I have known projects that have been able to deliver a great community and social impact with a 49 per cent return,” says Christine Chow, managing director at Homage Consulting, a boutique investment advisory service that has specialised in responsible investing since 2011.
And the performance of listed companies with a significant environmental, social or governance (ESG) component is similar to conventional equities. The average annual return on the MSCI World ESG Index
is 13.8 per cent during the past three years, only a fraction less than the return on the data company’s World Index.
Chow says the number of independent investors and high net worth individuals (HNWIs) she deals with in Hong Kong is growing consistently. Responsible investing is no longer a minority interest.
After a 17-year career in investment banking, Chow completed a PhD and now is an adjunct professor in social entrepreneurship and venture philosophy at The Hong Kong University of Science and Technology. She also manages the investments of her extended family.
She says there has been a significant increase in the number of Hong Kong investors who want to leave their mark by creating change.
“The institutional space is a traditional system,” she says. “A lot of innovative stuff is being driven by family offices and individuals because they don’t have to report to the [Hong Kong] Securities and Futures Commission.”
“As HNWIs, we need to recognise the incredible power that we have over our future and our capital. Big institutions have big money but we have the flexibility and the choice to direct capital where we want it, drive what we want to see happen, and leave our mark.”
Nevertheless, institutional asset managers are also attracted by the merits of ESG investing, according to ASRIA, whose 70 members include banks and fund managers.
“The future of sustainable investments is approaching quickly and quietly, especially at the institutional level of flows,” says ASRIA’s deputy chief executive Jackrit Watanatada.
“Some banks, such as Morgan Stanley with its ‘Investing with Impact Framework’, help clients identify opportunities that combine investment goals with societal concerns. This kind of approach is helping to demystify the world of sustainable investing, and debunks the idea that it’s less profitable or less rigorous than ‘normal’ investments.”
In addition, other financial instruments with a sustainability feature are gaining widespread acceptance.
At the Asian Financial Forum last January, Michael Bennett, the World Bank’s head of derivatives and structured finance, explained how the bank issued its first “green bonds” in 2007 to raise capital for projects that help mitigate the effects of climate change.
They have since evolved to fund a range of environmental programmes, and last year the value of outstanding green bonds exceeded US$35 billion.
“There’s also a burgeoning market for catastrophe-related securities, where investors are essentially looking at the ability through the capital markets to obtain premiums by providing insurance-type protection to sovereign governments,” says Bennett.
Chow urges investors to ask their relationship managers to work harder for them, and also to conduct their own research. She picks food safety and agriculture, affordable housing and healthcare as sectors with tremendous opportunities.
“Some of the affordable housing projects that I’ve looked into can potentially generate great returns, by providing a community need in an underserved market,” says Chow. Investing in genetic screening services in private hospitals that could then finance similar levels of care for patients in the state healthcare system also meets the criteria of earning profits and benefiting society.
Says Chow, “There are just so many opportunities to do good and make money at the same time.”