2021 seen piv­otal for sus­tain­abil­ity in­vest­ing

The Philip­pine Stock Ex­change (PSE), which now holds of­fice and runs a more com­pact uni­fied trad­ing floor at Boni­fa­cio Global City, switched power providers in Fe­bru­ary this year, from one that re­lied on coal-fired power plants to an­other that uses re­new­able en­ergy.

The PSE, af­ter all, is the first stock ex­change in the world to com­mit to the United Na­tions Frame­work Con­ven­tion on Cli­mate Change, tak­ing to heart its ul­ti­mate ob­jec­tive of help­ing rein in green­house gas emis­sions that are largely re­spon­si­ble for the dis­as­trous shifts in weather pat­terns.

The PSE’s mind­set re­flects the grow­ing con­scious­ness in the global cap­i­tal mar­ket to re­ward com­pa­nies that take bet­ter care of the planet and the peo­ple, and op­er­ate not just for prof­its. Green ad­vo­cates are no longer a lone voice in the wilder­ness and they are start­ing to make a con­crete im­pact on the way com­pa­nies do busi­ness and how in­vestors shape their port­fo­lios.

As­sets un­der man­age­ment in sus­tain­abil­ity-fo­cused funds are now at around $2 tril­lion glob­ally as of end-March this year while quar­terly in­flows hit a record $185 bil­lion in the first quar­ter, based on data from fi­nan­cial ser­vices firm Morn­ingstar. The first $1 tril­lion was breached in the se­cond quar­ter of 2020.

In Asia-Pa­cific alone, an­nual flows to sus­tain­abil­ity-themed funds hit $57 bil­lion in 2020, from just about $10 bil­lion a decade ago, based on data from JP Mor­gan.

In the United States, share­holder ac­tivism has been shak­ing up big oil gi­ants ExxonMo­bil and Chevron amid snow­balling dis­sent over their in­suf­fi­cient com­mit­ment to de­car­bonize. Two Exxon board mem­bers had been booted out and re­placed by nom­i­nees of En­gine No. 1, a small ac­tivist hedge fund that launched a cam­paign to pres­sure the com­pany to com­mit to a low-car­bon fu­ture.

And more mod­ern-day green Davids are tak­ing on Go­liaths.

In the case of Chevron, 61 per­cent of share­hold­ers heeded a call by Dutch ad­vo­cacy group Fol­low This to vote on a pro­posal to cut “scope 3” emis­sions. Scope 3 emis­sions are the re­sult of ac­tiv­i­ties from as­sets not owned or con­trolled by the re­port­ing or­ga­ni­za­tion, but that the or­ga­ni­za­tion has an in­di­rect im­pact through its value chain.

In the Philip­pines, such kind of share­holder ac­tivism has yet to stir the busi­ness world, but reg­u­la­tors are tak­ing the lead, if not the com­pa­nies them­selves ini­ti­at­ing the trans­for­ma­tion.

ESG in­dex

In Novem­ber last year, the govern­ment im­posed a mora­to­rium on ac­cept­ing new pro­pos­als for coal-fired power projects. On the cor­po­rate reg­u­la­tory side, the Se­cu­ri­ties and Ex­change Com­mis­sion ap­proved the “Sus­tain­abil­ity Re­port­ing Guide­lines for Pub­licly-Listed Com­pa­nies (PLCs)” back in 2019, re­quir­ing the dis­clo­sure of com­pli­ance and non­com­pli­ance with the rec­om­men­da­tions pro­vided un­der the Code of Cor­po­rate Gov­er­nance for PLCs op­er­at­ing in the Philip­pines.

By next year, as part of its bid to cham­pion “en­vi­ron­men­tal, so­cial and gov­er­nance” (ESG) met­rics, the PSE plans to in­tro­duce an ESG-track­ing in­dex to help sus­tain­abil­ity-fo­cused in­vestors.

Dur­ing a panel of South­east Asian stock ex­change lead­ers at the “ASEAN: Be­yond the Pan­demic cri­sis” fo­rum held by May­bank in late June, Ra­mon Mon­zon, pres­i­dent of PSE, said that as global in­vestors in­creas­ingly re­ward ESG com­pli­ance, this should raise the bar es­pe­cially for PLCs.

“I think the listed com­pa­nies can see that on the fixed in­come side, in­vest­ments on the green bonds are hap­pen­ing in the last three to four years but on the eq­uity side, that has not hap­pened.”

—PSE President Ramon Monzon

The sus­tain­abil­ity re­port­ing re­quire­ment is a good start as this al­lows in­vestors to know where each com­pany was at the ESG com­pli­ance level, Mon­zon noted.

“I think, that will start at­tract­ing eq­uity in­vest­ments into these com­pa­nies if we have an ESG in­dex,” Mon­zon said.

ESG goes be­yond con­cept of pro­mot­ing busi­ness ac­count­abil­ity and self-reg­u­la­tion through cor­po­rate so­cial re­spon­si­bil­ity prac­tices. ESG cri­te­ria are seen to make ef­forts to make a bet­ter im­pact on peo­ple and planet—and not just prof­its—more mea­sur­able.

“It’s not the be-all and en­dall but it’s im­por­tant be­cause it’s some­thing where there’s enough un­der­stand­ing, you could per­suade your listed com­pa­nies to do good com­pa­ra­ble dis­clo­sure,” Michael Syn, se­nior man­ag­ing di­rec­tor of equities of Sin­ga­pore Stock Ex­change, said dur­ing the same May­bank fo­rum.

“So the idea is for the mar­ket is to say [that] with the right dis­clo­sure, our mar­ket­place will price in ei­ther a green pre­mium or brown dis­count and the mar­ket will tell the com­pany do more of these or do less of that,” he said. “It’s like ac­count­ing stan­dards 30 years ago. It took 20 years to get IFRS (In­ter­na­tional Fi­nan­cial Re­port­ing Stan­dards) agreed upon. It will take an­other 10 years to get car­bon ac­count­ing work­ing. We soon have a lot of work to do but that’s a start­ing point.”

 

Sus­tain­abilty-themed eq­uity fund

“Sus­tain­abil­ity is about in­vest­ing in our fu­ture. The gen­er­a­tion con­sist­ing of Mil­len­ni­als and Gen Z is ex­pected to be the big­gest in­vestor mar­ket in the next decade. This new gen­er­a­tion has made it clear that sus­tain­abil­ity is an im­por­tant fac­tor in the way they spend and in­vest,” said Phillip Hage­dorn, chief in­vest­ment of­fi­cer of lo­cal as­set man­age­ment firm ATR As­set Man­age­ment (Atram).

Last Fe­bru­ary, Atram launched the first eq­uity fund in the coun­try that makes it se­lec­tion on the back of the UN Sus­tain­able De­vel­op­ment Goals (SDGs) frame­work. The in­vest­ment the­sis is that as com­pa­nies in­te­grate more sus­tain­abil­ity is­sues into their busi­nesses and con­tin­u­ously im­prove on in­te­gra­tion, this will drive longterm re­turns and re­duce costs.

Atram formed this fund, which is avail­able for a min­i­mum par­tic­i­pa­tion of P1,000, on a fer­vent be­lief that in­sti­tu­tions and the youth should have a voice in how com­pa­nies build their fu­ture.

“Sus­tain­abil­ity has be­come more rel­e­vant in a post­pan­demic en­vi­ron­ment that has waged a hefty cost on so­ci­ety and the econ­omy. The fund hopes to mit­i­gate some of these ef­fects by in­cen­tiviz­ing com­pa­nies to con­tin­u­ously in­vest in well­ness, progress and fair­ness as ex­pressed in the UN SDGs. There is a need to draw in­spi­ra­tion from those who put wel­fare and re­spon­si­bil­ity at the fore­front,” Hage­dorn said.

“If more com­pa­nies pay it for­ward, we can make a huge dif­fer­ence for the en­vi­ron­ment, so­ci­ety and the econ­omy,” Hage­dorn added.

 

Big win for cli­mate change

Willem Sels, global chief in­vest­ment of­fi­cer at HSBC Pri­vate Bank­ing and Wealth Man­age­ment, said at a brief­ing in June that this 2021 would be a piv­otal year for sus­tain­able in­vest­ments given the com­mit­ments of gov­ern­ments to achieve net zero car­bon emis­sions.

“Sus­tain­abil­ity cre­ates new growth in­dus­tries, such as elec­tric ve­hi­cles, bat­ter­ies, hy­dro­gen and new elec­tric­ity grids to adapt to so­lar and wind en­ergy. The United States, Eu­ro­zone and China are try­ing to max­i­mize their mar­ket shares in these new green tech­nol­ogy in­dus­tries, and this com­pet­i­tive race will speed up in­no­va­tion and bring new in­vest­ment op­por­tu­ni­ties. We be­lieve a good strat­egy to in­cor­po­rate ESG fac­tors in a port­fo­lio is through a mul­ti­as­set ap­proach.”

—Willem Sels, Global CIO – HSBC Pri­vate Bank­ing and Wealth Man­age­ment

Joe Bi­den’s elec­tion as the new US pres­i­dent is also seen as big win for re­new­able en­ergy and cli­mate change mit­i­ga­tion ef­forts. One of his first ma­jor moves as the US CEO was to re­join the Paris Cli­mate Agree­ment, which has a roadmap to pre­vent cli­mate change and curb global warm­ing.

“It’s al­most a race among dif­fer­ent gov­ern­ments to com­mit more than the oth­ers and that’s not just be­cause they want to do the right thing or their vot­ers are turn­ing more into green par­ties and push­ing them to adopt a more greener agenda. I think it’s also a race among coun­tries to gain mar­ket share in this grow­ing area of the econ­omy,” Sels said.

The United States, Europe and China will want to max­i­mize their share in the green econ­omy, thereby cre­at­ing a lot of in­no­va­tion amid tough com­pe­ti­tion, he said.

Within HSBC Pri­vate Bank’s clien­tele, con­sist­ing of high net worth in­di­vid­u­als, Sels said the in­ter­est on sus­tain­abil­ity was grow­ing, es­pe­cially now that peo­ple could ac­tu­ally see the sci­en­tific ba­sis of calls for bet­ter en­vi­ron­men­tal stew­ard­ship.

 

Sus­tain­abil­ity rev­o­lu­tion

“Clearly there is a cost and the tran­si­tion for some com­pa­nies is more costly than the oth­ers. But I don’t think there’s an al­ter­na­tive for com­pa­nies, be­cause what­ever sec­tor you are look­ing at— like au­to­mo­tives or in­dus­tri­als—within each sec­tor, ev­ery­body has a com­peti­tor and if your com­peti­tor is bet­ter at mak­ing the trans­for­ma­tion, they will see their share price out­per­form, in our view. Why? Be­cause they get bet­ter em­ployee re­ten­tion, there­fore [they have] bet­ter tal­ent and they will have con­sumers pre­fer their prod­uct,” Sels said.

Even in old in­dus­tries, Sels said there would al­ways be in­no­va­tions that could be done to embrace the sus­tain­abil­ity rev­o­lu­tion.

“Com­pa­nies that are not look­ing at ESG at all are at risk of dy­ing be­cause they are go­ing to have busi­ness mod­els that are ir­rel­e­vant,” Sels said.

“It’s a bit like the tech­nol­ogy rev­o­lu­tion. If you think about it, it’s ob­vi­ous that those com­pa­nies that are more tech­no­log­i­cally ad­vanced are the out­per­form­ers. We think the same is go­ing to hap­pen with sus­tain­abil­ity. It may take years but 2021 will be a year of ac­cel­er­a­tion of this trend,” he said.

 

This story was first published in the August 27, 2021 issue of the Philippine Daily Inquirer’s Road to Clean Energy special report.