18th October 2023
The world of sustainable investment has exploded. Rarely can one read an investment story without ESG (Environmental, Social and Governance) references. Seemingly, every fund manager MPF Ratings meets now includes slides on how ESG factors are considered in their investment decisions.
But, if you think the path to sustainable investing is smooth it’s time to think again.
The Mandatory Provident Fund Schemes Authority (“MPFA”), the regulator of Hong Kong’s HK$1 trillion plus MPF system highlighted 7 key sustainable investing principles in 2021 when it issued its “Principles for Adopting Sustainable Investing in the Investment and Risk Management Processes of MPF Funds”. Highly important, a key priority, and “sustainable investing is the new normal” said the MPFA, but the circular also revealed a conflicting message, that “ESG integration does not mean sacrifice of risk-adjusted returns”. So does this mean for example, the stellar performance of the traditional energy companies in 2022 should have dampened enthusiasm for renewable energy, or as shipping rates dramatically increased as COVID-19 disrupted supply chains we should have ignored the labour practices and carbon footprint of logistics companies?
The balance between responsible investing, and risk versus rewards is equally as difficult as it is important, but done correctly responsible investment can generate better returns for MPF members.
A strong investment process considers a full spectrum of strengths and potential risks, and ESG factor analysis is simply another lens through which one can analyse an investment. For example, an ESG-integrated investment process will identify that a company is not disposing of waste efficiently (environmental risk that could lead to reputational damage) or has a strong culture that leads to happier employees (social opportunity). Companies are increasingly redirecting large amounts of capital into pro-ESG areas like renewable energy, electric vehicles (EV), and employee wellbeing and the results can be profound.
Take the example of EV’s. It is expected that automakers will spend around US$1.2 trillion through to 2030 switching their product lines towards EVs. In 2022, global investment in low-carbon energy transition equalled US$1.1 trillion – a significant amount of capital in a single year. Notably, companies that have reduced emissions faster than their peers over the last five years have outperformed those in the worst quintile (bottom 20%) of emissions management by approximately 3% per annum. In layman’s terms, what this says is companies who redeployed their capital in an effort to reduce emissions more than their competitors showed a 3% better investment results annually for their shareholders. For a MPF member or any long term investor, compounding 3% every year is truly significant.
Speaking of long term, ‘long term’ is a phrase that is as often used as it’s misrepresented in the investment world. Even the most ardent believer can’t help but sneak a glance at overnight markets or stay up late to watch their preferred financial news network. Sustainable investing is genuinely a long-term game because it’s going to take years for many of these themes, such as the renewable energy transition or addressing the male-to-female ratio on Boards, to play out. It is likely that there will be some short-term volatility and gains will not be linear, but over the longer term these themes will likely be beneficial and key to achieving this rests with investment professionals engaging with companies to improve.
The good news for Hong Kong workers and MPF members is that they can both implicitly and explicitly benefit from this paradigm shift. There are a growing number of funds within MPF schemes that all focus on sustainable investing. AIA MPF – Prime Value Choice’s Green Fund has a sustainable investing storyline, but more recently MPF’s two biggest participants, Manulife and Sun Life have launched funds with a clear sustainable investing focus. In particular, Sun Life’s recently launched MPF Global Low Carbon Index Fund uniquely fulfils key provisions of the MPFA’s sustainable investing principles with particular focus on benchmarks and measurables to determine its ESG impact.
Positively too is global regulation, and Hong Kong and the MPF system has been at the forefront. In addition to launching its “Principles for Adopting Sustainable Investing in the Investment and Risk Management Processes of MPF Funds” the MPFA also introduced its initiative to “Enhance Transparency of Governance Reporting of MPF Schemes” in 2022, the same year the US regulator, the SEC rolled out its sustainable disclosure regulation. More broadly an increasing number of guidelines, regulation and best practice initiatives are being introduced in both Developed and Emerging Markets. When these policies are brought in, investors will want to own companies on the ‘right’ side of this change because there is a risk in holding those that have to spend huge amounts in a short time period in order to catch up.
All in all, investors do not have to give up returns in order to invest responsibly and in fact there is evidence that investing responsibly and integrating ESG factors is additive to returns. However, not all responsible investment strategies are created equal and in addition to AIA’s Green Fund, Manulife’s MPF Hang Seng Index ESG Fund and MPF Sustainable Pacific Asia Bond Fund, and Sun Life’s MPF Global Low Cardon Index Fund, MPF Ratings expects further new fund launches in 2024 so please consult an independent financial advisor to see which funds and MPF scheme best suits your personal objectives.
This article was written by MPF Ratings, Hong Kong’s independent provider of MPF research, views and education, in conjunction with Belvest Investment Services, a leading Hong Kong based independent financial planning and wealth advisory group.