Climate change has become an ever-increasing concern for millennials and gen Z. According to a study conducted in 2021 by the World Wide Fund for Nature Singapore and Accenture, 4 out of 5 Singaporeans say they care about the environment; 29% of respondents would “buy more sustainable products if they had more information about their purchases’ impact on sustainability.“
The growing trend of sustainable consumption has also spilled over to the investing world, as investors seek to invest in companies that align with their value of caring for the environment. 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 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 Invest In ESG Companies?
As people are better educated on environmental and social problems over the years, and the rise of eco warriors on the internet and social media encouraging more people to advocate environmental and social causes, more people are becoming aware of the ever growing environmental and social issues that are plaguing the world.
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. Stakeholders include customers, suppliers, employees, investors, communities and others who stake in the organisation.
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.
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 table below summarises the pros and cons of ESG:
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
Tiger Brokers is one of the cheapest online brokers on the market.
Pros
- Low cost trading fees
- Cheap trades on the HKSE
- Easy to use platform
Cons
- Limited market access
Get a S$20 Cash Coupon and 1 free AAPL Stock (worth ~S$243) when you deposit S$100 and make 1 buy trade.
Valid until 1 July 2024. T&Cs apply.
Moomoo
moomoo by FUTU is a great brokerage for investors who are looking for a platform that allows them to get the most bang for their buck.
Pros
- Lowest commission fees in Singapore
- Lifetime $0 commission for US stocks
- No minimum income requirement
Cons
- Commission free trades only apply to US stocks, does not apply to SG or HK stocks
- High margin rates
SAXO Capital Markets
An excellent, low-cost platform that offers great market access.
Pros
- Low-fee brokerage with great user interface
- Access to international markets
- Fees for higher-tier monthly plans can be waived with points
- Earn interest on uninvested cash without any lock-in period for higher-tiered accounts
Cons
- Interest on cash balance not available for the Bronze account plan
Conclusion
Most Singaporeans do not know where to start with ESG investing, as they may worry that 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 keeping in mind the pillars of sustainable investing can help you take a step in the right direction.
Now that you understand what ESG investing is and how you can start investing sustainably, check out which online broker in Singapore suits you best.
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