How higher investment returns and sustainability go hand-in-hand

Half of Singaporeans believe they’ll need to compromise returns, but St James’s Place’s Robert Gardner says otherwise.

Coca-Cola. Shell. Exxon. Levi’s Jeans. One of these are not like the others—and knowing the difference might just help investors on their quest to be more environmentally conscious, socially aware, and governance-mindful in their investments, all whilst not compromising their returns.

Despite growing interest for sustainable investing amongst Singaporean and Hong Kong investors, they are reportedly still reluctant to shift, fearing that doing so will compromise strong returns. This is what a study by St. James Place Wealth Management found: 60% of Hong Kong investors and 57% of Singaporeans said they consider environmental, social, and governance (ESG) factors in their investments. But over half of Singaporeans (53%) and Hong Kong investors (60%) also espoused their belief that they will need to compromise on investment returns in order to invest responsibly.

In reality, the opposite is true, with market data showing a strong correlation between investments with strong ESG ratings and better performance, says Robert Gardner, Director of Investments at St. James Place Wealth Management, a wealth management company that manages about $1.86b (£1b) in clients’ assets in Asia alone and has over 70 partners in Singapore.

Investments with stronger ESG credentials are more likely to have better long-term growth prospects, since they are by nature much more sustainable, he said.

So which ones of the four companies mentioned earlier will pass ESG factors? To know the answer, investors must know the difference of responsible investing and traditional ethical investing. Gardner points out that responsible investing, or ESG investing, focuses on engagement, whilst the other one is all about divestment.

“The key thing about responsible investing is not ‘divesting.’ It's not saying we won't invest in these companies,” Gardner explains in an interview with Singapore Business Review. “It's saying we want these businesses at the board and at the executive level to think about the big society, societal issues and to work on them step-by-step ferociously to build better businesses for tomorrow.”

Gardner notes that it’s about the direction of travel, not the starting point. “[We're] more interested about, "How aware is the company have these issues? And how seriously is it tackling them?” he adds.

For example, in the oil and gas sector, companies like Shell and BP are engaging and acknowledging the Paris Climate accord and the challenge of meeting energy needs whilst transitioning to delivering energy in a cleaner and safer way, he adds. In contrast, other companies are not engaging, notably the US giants Chevron and Exxon—the latter reportedly producing about $39b worth of environmental damage every year, says Gardner.

In other words, for an investor looking for ESG-compliant investments, Shell is a yes whilst Exxon is currently a no.

Another example of a company engaging ESG issues is Coca-Cola.

“There might be investors that might say, 'Coca Cola produces sugary drinks that's really bad for children [and] produces lots of plastic bottles. So I'll divest.' A responsible investor says, 'You know what, Coca Cola's been around a long time, it's one of the most successful and iconic brands on the planet.' And we want to work with Coca Cola to make sure that they're still here, they're going to be a better company 10 years from now,” Gardner said.

Today, the company has reportedly halved the amount of sugar in their drinks over the last decades, says Gardner, and has put real R&D and effort into thinking about how can they distribute their products with less plastic. So to ESG investors, Coca-Cola is a yes. 

Levi’s Jeans have also just announced their water-less technology last year, reducing their usage of water in manufacturing jeans by 96% compared to before. In other words: Levi’s is also a yes.

Stronger returns
SJP’s study crucially found that only a third of the 1,045 Singaporean investors they surveyed are prepared to make a ‘financial sacrifice’ for a more sustainable investment portfolio. But as per Gardner, investors need not to make any ‘sacrifice’ at all.

All of SJP’s funds all take into account ESG factors, resulting in their carbon footprint about being 15% less than an average investor’s portfolio who passively invests in an index, says Gardner, who is in charge with a global team of over 4,300 wealth and financial advisors and has over 780,000 clients, investing $239.55b (£129b) assets under management.

And their clients have reportedly reaped what they sowed, doubling the money they invested in the past 10 years with a 100% net return. In particular, its funds have a Sharpe ratio, a risk-adjusted return of nought point seven, double the Sharpe ratio of investing in equities—meaning that they’ve achieved strong performance with less risk, according to Gardner.

For example, one of SJP’s fund managers Bluebay, manages a fixed income portfolio and invest in Brazilian government bonds, where they in engage with the Ministry of Finance in Brazil. Bluebay has reportedly made it clear with the government that they will only invest with them as long as they continue to tackle deforestation, shares Garder. If that changes, they've told the Ministry of Finance that we will no longer invest in their bonds.

Gardner also noted Singapore, where the Monetary Authority of Singapore has taken big commitments and steps around trying to make Singapore a leading sustainable investor on the global financial stage.

In his Budget speech, Deputy Prime Minister Heng Swee Keat said the government also plans to issue green bonds on select public infrastructure projects, identifying up to $19b worth of public infrastructure.

More E than S and G
Demographic-wise, Gardner says that they’ve observed higher demand from clients under the age of 45 than those above it. However, the rate of change has been faster in the older demographic—driven by their children and grandchildren.

“On the conversations I've had with clients, it's normally because their children or their grandchildren ask them,” he noted. “I think older generations are motivated by their children and their grandchildren and thinking in that kind of multi generational [way], 'am I a good ancestor? Did I do everything I could as a parent or a grandparent to make sure that the world would be a better place for my future generations?’”

He also observed more interest in the environment part of ESG factors compared to the social and governance factors, but adds that the pandemic and the rise of the Black Lives Matters movement in 2020, amongst other types of social unrest in the past year, have increased interest in social factors. 

“Globally, we are becoming more aware, and I think maybe 2020 and COVID-19 accelerated that awareness,” he said. “I think, [with] most of us have been stuck at home and you're forced to stop and think. People are being forced to stop and think about the bigger questions, ‘what's this all about? What impact are we having?’”

For their part, SJP has made steps to become more sustainable in their investments, announcing their target for 100% of their fund managers to be signed up to the United Nations principles of investing, and signing up for the United Nations Global Compact—meaning, that they have committed to aligning their investments to the United Nations Sustainable Development Goals.

SJP has also signed up for the United Nations net zero asset owners Alliance, a goal that has SJP committing that they will will get all of our clients’ portfolios down to net zero by 2050.

“When you invest your money, it's engaging, it's making these businesses better. And that's what has real leverage,” Gardner said.

“And there's a stat I love to quote, which says that if you invest your money in a sustainable and responsible way over a 40-year period that has 27 times the impact of flying last, eating less red meat, and cycling to work. So that ability point is: I can invest my money and I can have a real impact.”