Not only will recent inflows into ESG-themed investments be sustained in the long run, but ESG considerations will also be integrated as a key component in major investment strategies, according to HSBC Private Banking’s Fan Cheuk Wan.
The managing director, chief market strategist, Asia, at HSBC PB explained to Asian Private Banker that, despite being a relatively new phenomenon, COVID-19 “has raised both institutional and private investors’ awareness of ESG topics and prompted them to reassess their role in society and their relation to the environment”.
It is a continuation and acceleration of an age-long process — the talk of incorporating environmental, social and governance (ESG) factors into investments has long been on investors’ minds. This year, both Credit Suisse and UBS have included ESG/sustainable investing into the latest investment trends, citing its defensive performance and alignment with structural changes in the economy.
Fan noted that in terms of assessing the state of ESG investing, one needs to differentiate between short-term tactical strategies and longer-term trends. “In the short term, we do see investors — driven by tactical investment needs — rotating into some of the lagging cyclical sectors as a result of recent market rallies. In the long run, ESG investing will eventually develop into a mainstream investment approach.”
Using ESG for risk management
“When we look at ESG funds or ESG ETFs, they normally have less exposure to the more volatile energy sector, and they have a more significant allocation to technology companies, since many of them offer solutions to address a host of the ESG-related challenges,” Fan explained, adding that the positioning of this sector has been one of the key contributors to the ESG outperformance during the COVID-19 pandemic.
More importantly though, the relative outperformance of ESG investment versus their respective market benchmark is the result of stringent screening and selection processes.
“Investors have increasingly started to see the ESG factor as an important and effective risk management tool to help them differentiate quality assets and identify their exposure to ESG-related risks,” Fan said.
According to Fan, the stock/bond selection based on ESG investment principles is akin to the approach for screening quality stocks and bonds. “ESG […] can be a tool for investors to screen and select quality companies to stay more resilient in the face of macro headwinds.”
These factors could partly explain the strong inflow into ESG mutual funds and ETFs during the pandemic, she explained.
Diversifying within ESG investing
Currently, the ESG fund universe is still equity-dominated, but Fan argued that more opportunities are emerging in a diversity of asset classes.
For instance, within sustainable fixed income (where green bonds have been dominating), the latest trend is pivoting towards sustainable bonds — a broader set of principles that cover many aspects of the sustainability subject, such as the Sustainable Development Goals of the UN.
“This latest development brings a much broader investment scope, encouraging more investors to add allocations to sustainable bonds,” Fan remarked.
She added: “Many of these sustainable bonds are quality, investment-grade assets. There is solid investment demand for resilient income in this low growth and low yield environment, and investors are looking for investment vehicles that offer optimised yields at controlled risk. The sustainable bonds add the additional risk management element for yield seekers.”
In addition to sustainable bonds, Fan said impact investing too is an area worth highlighting, “especially for private investors […] who seek positive impact but equally want to generate sustainable returns in the long term”.
“Impact investing comes in as one of the safer investment solutions to help clients do good on the one hand and generate steady and resilient income on the other,” Fan explained. “Many of the impact investing solutions in the private equity space usually have a long-term horizon and can meet the long-term investment goals of strategic investors.”
Last month, HSBC Private Banking rolled out a private equity impact fund to Asian clients — especially UHNW and next-gen investors.
Earlier this year, Virginia Devereux Wong, regional head of funds & ETFs, Asia, HSBC Private Banking, told Asian Private Banker that ESG mutual funds and ETFs will remain a “key focus of growth and offerings” for the bank in 2020.
Embedding ESG into portfolio management
HSBC PB offers bespoke ESG discretionary mandate solutions to family office clients — tailored to their different preferences and ESG concerns. And the ESG investment approach has been incorporated into the delivery of discretionary mandates.
“Our fund managers […] for discretionary mandates have incorporated ESG research analytics as part of our day-to-day investment decision-making process since 2007. Hence ESG investment principles are already well embedded in their portfolio management process,” Fan said.
Furthermore, to combat the rising challenge of “greenwashing”, HSBC PB has developed “a comprehensive matrix for the ESG fund selection process”: the product due-diligence process involves both quantitative and qualitative screenings, capitalising on both in-house and third-party data and research capabilities.
“The ecosystem of ESG investment in Asia is still less developed than in the more developed markets (such as Europe or North America).” But Fan is optimistic that the growing awareness of ESG, especially among new generations of wealth owners, will drive a medium-term shift in investment philosophy in the region.