Why ESG investing is doing good for you and your portfolio

With most of the world staying home and taking a rain check on almost every “non–essential” activity, it is a much quieter and perhaps cleaner world out there. This comes as a reminder to be more responsible to the world we live in and not take it for granted. The same can be said for investments.
Francois de Bruin, Head of Listed Real Estate and Porfolio Manager at Aviva Investors shared why it makes sense for investors to incorporate environmental, social and governance (ESG) principles into their investments and how the launch of its Sustainable Income & Growth Fund (SIG) can help investors gain long–term regular income with a responsible investment focus – even during these extraordinary times.
Q: Why did Aviva Investors launch the SIG and why now, given the Covid–19 situation globally?
The Aviva Investors Sustainable Income and Growth Fund is a multi–asset portfolio which aims for long–term sustainable income and targets people planning their retirement. Environmental, social and governance (ESG) criteria are fully integrated into the investment process.
The COVID–19 pandemic has caused the containment and lockdown globally. As fear gripped investors, they panicked and fled for safe haven assets primarily in the form of cash and government bonds. While the heightened uncertainty may well vindicate those actions for the foreseeable future, investors should understand that such a strategy presents its own risks.
In an environment of volatile markets and concerns over growth, SIG can play an important role in addressing the needs of investors in Singapore for long–term regular income with a responsible investment focus.
Deliver High level of income
The fund aims to deliver 5% income against a backdrop of very low yields in both equities and bonds without paying from capital.
With yields across many sectors now significantly wider, we've taken aggressive measures to cut all holdings we believe won't be able to pay their distributions. These have predominantly been linked to oil, retail and leverage.
While market and regulatory pressures are casting doubt over dividends and coupons being paid, our bottom–up approach allows us to hold companies where individual balance sheets and resilience gives us significantly greater confidence than holding the broader market.
ESG Credentials: mitigate against poor management teams
Part of the reason why we have a high degree of confidence that the names in the portfolio will survive, and ultimately thrive after this crisis, is because of the strong ESG credentials of the fund.
The fund remains the only multi asset income fund with the SRI label and has an ESG score of 6.19, materially higher than the market at 5.81. We screen out the bottom 20% of our universe where management teams are notoriously poorly aligned to shareholder interests.
An attractive entry opportunity and remain invested
We believe the recent events have created an attractive entry point for new and current investors. While uncertainty abounds, the fund is well equipped to benefit from recovering markets. With monetary and fiscal policy working in lockstep, the backdrop for strong returns looks well supported once COVID–curves start to flatten, of which we are already starting to see evidence in some parts of the market.
As hard as it was timing the top of the market, it will invariably be equally difficult timing the bottom. Investors tempted to sit on the side lines should know that since the start of 1999, the S&P 500 delivered 203% to the end of March. If an investor missed only the 10 best days, the return would’ve been a lowly 40%, and -15% if the 20 best days were missed. Investors therefore need to consider both their near–term and long–term outcomes when adjusting their allocations.
Q: What are the common misconceptions that investors have when one talks about “sustainable investing” and "ESG"? [What about the “S” (social) and the “G” (governance)?]
The phenomenal rise of ESG investing in recent years has been accompanied by a proliferation of terms. Often these are used interchangeably, which only serves to increase the confusion for many observers. In practice, there are three broad categories:
- Ethical: this is probably the version that has the longest history. In practice, it entails excluding certain investment opportunities (normally equity stocks) because the company concerned derives much of its income from unacceptable activities. Typical exclusions relate to the involvement in tobacco, weapons, pornography or gambling activities
- Sustainable: this is where an investor actively chooses investments for their positive benefit. This is more nuanced than the screening– based approach of ethical investing. Often a sustainable solution will include companies or countries that have appear poorly qualified but are in fact on an improving trajectory.
- Impact: these solutions seek to deliver a quantifiable positive benefit – for example they may orientate their investment strategy to limit climate warming to a specific level.
Environmental, Social and Governance considerations are taken into account in all of these approaches. In the case of Sustainable investing, an assessment is being made of ESG criteria alongside more traditional fundamental metrics when making investment decisions. At Aviva Investors, we believe that by assessing the management quality of any investment against a broad range of ESG metrics, it helps to mitigate portfolio risk and deliver better outcomes for clients. Companies that take care to monitor their supply chains, treat their employees fairly, collaborate with the communities in which they are based, and are open to engagement and challenge at shareholder meetings are also the companies that are more likely to have sustainable business operating models. For investors, this makes for a more attractive investment opportunity, as it enhances the resilience of future cash flows – whether they are delivered to investors as dividends or reinvested in the business for capital growth.
Q: From a returns perspective, why should investors choose an ESG fund vs a non–ESG one, especially now with the Covid– 19 situation globally? Does it still make sense for investors to look into ESG funds now?
Numerous studies have shown that sustainable investing can deliver enhanced returns over a non–sustainable approach. Even amongst studies that fail to show a positive correlation between this approach and investment returns, they show no correlation with poor returns. In other words, there is significant evidence to support the case for sustainable investing, and little to suggest that it will result in poorer returns.
With this in mind, we believe that the long–term case for adopting a sustainable approach is well–founded. The current situation with Covid–19 only serves to reinforce the importance of investing in companies with good business practices. During the Global Financial Crisis of 2007–2009, seventeen companies in the S&P500 went bankrupt. The fact that fifteen of these companies had below average ESG scores serves to reinforce the importance of integrating ESG considerations into an investment process. Even if you remain unconvinced about the case for improved investment returns, integrating ESG should help mitigate risk and deliver better alignment with the interests of many investors.
Q: Does having an ESG–Integrated mandate restrict the investment universe of SIG? How does Aviva Investors SIG mitigate this?
ESG integration does not in itself mean that an investor is restricting their investment universe. That said, a powerful case can be made for screening processes that do restrict the investment universe. For example, coal producers are creating a product that is inextricably linked with global warming, and faces increasing regulatory headwinds. So from the perspective of a long–term investor, they do not appear to be a particularly attractive proposition. While they may be excluded because of their association with global warming, this restriction of an investible universe should not detract from long term returns. The same might also be said for tobacco companies–excluded for the impact they have on the health of the global population, but also facing ever increasing global regulation.
A key way to mitigate the impact of ESG integrated investing is to start with a broad investible universe. By doing this, it provides fund managers with a sufficiently diverse opportunity set in which they can distinguish between winners and losers. Critically, it is important to remember that the winners are not always investments that appear to be winning at the point of investment. So a more nuanced approach to ESG integration entails engagement. While fund managers can work with restrictions, they also need to be given the freedom to invest in companies or countries that, on the surface, appear to have poor ESG credentials, but are in fact making progress. This may be the oil company that is transitioning to green energy production, or the developing country where press freedom, fair elections and eradication of corruption are becoming more entrenched.
So we believe that by starting with a wide opportunity set, and adopting a pragmatic approach to engagement, it is quite possible to integrate ESG into an investment process (including with restrictions), and still deliver meaningful outcomes for our clients.
YOU MAY ALSO LIKE
Disclaimer
All information here is for GENERAL INFORMATION only and does not take into account the specific investment objectives, financial situation or needs of any specific person or groups of persons. Prospective investors are advised to read a fund prospectus carefully before applying for any shares/units in unit trusts. The value of the units and the income from them may fall as well as rise. Unit trusts are subject to investment risks, including the possible loss of the principal amount invested. Investors investing in funds denominated in non-local currencies should be aware of the risk of exchange rate fluctuations that may cause a loss of principal. Past performance is not indicative of future performance. dollarDEX is affiliated with Aviva but dollarDEX does not receive any preferential rates for Aviva products as a result of this relationship. Unit trusts are not bank deposits nor are they guaranteed or insured by dollarDEX. Some unit trusts may not be offered to citizens of certain countries such as United States. Information obtained from third party sources have not been verified and we do not represent or warrant its accuracy, correctness or completeness. We bear no responsibility or liability for any error, omission or inaccuracy or for any loss or damage suffered by you or a third party (including indirect, consequential or incidental damages) arising in any way from relying on this information.
This information does not constitute an offer or solicitation of an offer to buy or sell any shares/units.
This article has not been reviewed by the Monetary Authority of Singapore.
Information is correct as of 12/05/2020.