Funds & ETFs: PhillipCap on ESG
Even after years of championing ethical and impact investing, Wayne Bishop finds himself having the same conversations about environmental, social, and corporate governance (ESG) from two decades ago. “I meet a bunch of cynical advisors somewhere in the country and they say, ‘Oh, but [we already avoid] tobacco…,’” says the CEO of King & Shaxson Asset Management, part of the PhillipCapital Group of companies, in an interview with The Edge Singapore.
Avoiding tobacco companies is a modern-day example of negative screening, where investors actively exclude companies that do not align with their values. The practice started in the 18th century with the Quakers’ refusal to invest in the slave trade, says Bishop, giving an early example of ESG investing.
Despite what sceptics believe, ESG investing has progressed far beyond just excluding tobacco producers and weapons makers; it is even returning handsome yields amid a turbulent time, says Bishop, who is based in the UK.
“No one can say you’ve really lost money investing in ESG,” he says. “One of the nuances of ESG investing is you will tend to underweight some of the more volatile areas in the market, [like] oil or certain commodities.”
“Everyone says you’re having more risk and a lower return, but the past has actually tended to give evidence that it’s the other way around,” he adds.
According to the biennial Global Sustainable Investment Review, which summarises the status of sustainable and responsible investing in Europe, the US, Canada, Japan, and Australia and New Zealand, total assets under management (AUM) of ESG funds in the five markets stood at US$30.7 trillion at the start of 2018, a 34% increase from 2016.
As ESG investing begins to pick up steam, however, the maturing of this investing style may introduce “a bit more volatility”. As the world commemorates the 51st Earth Day on April 22, Bishop outlines three key drivers that are fuelling ESG interest among investors and commitment from corporations today.
First, data is forcing investors and corporations to remain transparent. “If a coal mine opens in Indonesia, for example, within hours we will know the banks behind the deal, and we will have organisations pushing for protests or statements,” says Bishop.
“When I first began to look at ethical investing and companies, we had corporate reports that were produced once a year, which gave us a small amount of information. Now, we have information instantaneously, and it’s a great deal of information,” he adds.
“That has been an absolute game-changer. I think people sometimes overlook this whole sector of ESG. It is now so much more viable because the information is there.”
Next, the maturity of the sector has changed the face of ESG completely, says Bishop. “When I wanted to invest in renewable energy in 1993, the only option for me was hydroelectric [power], and that was typically a subsidiary of a big company,” he recalls.
“With wind turbines [then], you were lucky if it powers a television set; it was off the scale in terms of viability. Solar was for powering your calculator, nothing else,” he quips.
The energy sector has since evolved to in
clude newer renewable sources. Danish multinational company Ørsted is today the world’s largest developer of offshore wind power, but the company, founded in 1972, was popularly known as Danish Oil and Natural Gas (DONG). “We couldn’t invest in DONG because it didn’t meet a negative screen until they had a complete conversion and got rid of their oil and gas [assets],” recalls Bishop. “How the sector has matured cannot be understated,” he adds.
Finally, a generational shift in capital is underway, and not just among the most vocal millennials. Bishop points to the rise of the Gen X investor, “who are probably the people who are shifting the dial”. “They’re the people with the money, they’re in their 40s and 50s”.
“Over the last five to 10 years, they have gained command of wealth, and they are more ethical than people gave them credit for,” adds Bishop. “We talk about the millennials; they make the noise, but they have no money. Gen X has the money, and that is the difference; that is what is shifting the data.”
Japan leads the way
That said, a middle-aged Briton would not hold the same priorities and beliefs as his contemporary in Singapore. Everyone subscribes to a
different code of ethics, says Bishop. “There are some clear facts, if you like. ‘This stuff damages the environment’, for example… But everybody’s ethics are built by their filters, their upbringing and their experiences,’ he adds.
At home, Linus Lim, CEO of Phillip Capital Management, believes investor education is sorely needed in the region. “If we talk to 40- or 50-year-olds here, it might be a very different response. Even for younger people, their response could be like, ‘Why should we [look into ESG]? Prove it to me.’ Education is required to understand why it is important.”
At the same time, Lim is wary of reducing ESG indicators to just signposts when assessing companies. “I don’t want it to be so binary, where people go, ‘Oh, this company is a bad company. This company is a bad guy.’ It’s not that simple; it’s a nuanced discussion, but I think that conversation also takes time. We need to educate first, then go into the nuances a little bit later.”
According to the Global Sustainable Investment Review 2018, negative screening is still the most popular ESG strategy globally (US$19.8 trillion at the start of 2018), followed by ESG integration (US$17.5 trillion) and corporate engagement and shareholder action (US$9.8 trillion). Unlike the Western markets surveyed, corporate engagement and shareholder action is the dominant strategy in Japan, the only major ESG market from Asia.
Japan has become Asia’s market leader in ESG due to a “rapid mobilisation” in public and political opinion, says Lim, pointing to the 2011 Fukushima nuclear disaster as a major inflexion point. “That changed the way Japanese policymakers and individuals view the world, that we are very vulnerable to the world and the environment around us.”
As the rest of Asia catches up with Japan’s decade-long headstart, Phillip Capital Management’s ESG strategy for the region will be determined by its investors’ needs, says Lim. “We’re glad to have Wayne alongside us to add an international perspective; he’s walked that journey a little further than us.”
Singapore sows the seeds
The brokerage’s Singapore office also finds a new direction in Stephen Beng, who joins Phillip Capital Management as head of ESG strategy this month.
“These are very exciting times for capital markets and seeing what we can do to influence change,” says Beng, who returns to the financial services industry after two decades in conservation. “I see this as an extension of my stewardship to the environment that I’ve always been in, also in service of the people and the community around me.”
Beng founded eco-travel agency and consultancy Sea Hounds in 2001, developing programmes for underprivileged students that were endorsed by the Ministry of Education and SportsSG.
Along the way, Sea Hounds was also recognised with industry awards like the Singapore Environmental Achievement Award in 2012 and the National Geographic Centre Award from 2004 to 2014.
As the current chairman of the Friends of Marine Park (FMP) community, Beng is working on establishing Singapore’s first marine park surrounding the Sisters’ Islands, which will be home to Singapore’s first turtle hatchery. Activities for the public are expected at Bendera Bay at St John’s Island from this year.
Prior to his foray into marine conservation at the turn of the millennium, Beng served as vice-president at FinTech company Allegro Solutions and regional account manager at MCM Asia Pacific.
“We have the capability to influence change with technology. As far as the approach goes, we want to partner, not punish,” says Beng.
“ESG investment is an approach where the fundamental principles and objectives of investing don’t change. We’re still working towards good performance but whilst we’re doing that, we also want to use capital as a tool, a driver and an influencer, to make changes necessary to stop deterioration and to contribute to global goals,” he adds.