High-net-worth individuals (HNWIs), particularly those that are part of the younger generation, have a keen interest in environmental, social and governance (ESG) investment, a trend that was discussed earlier this month in Singapore at the 6th ESG Summit, part of The Asset’s Asia Bond Market Summit, at which private bankers explored the potential and challenges of ESG investment for HNWIs.
While sustainability practices are more prevalent in Europe and the US, “in Asia, we are still trying to find out our feet especially with the wealth community,” notes Daryl Ho, senior investment strategist at DBS, one of the summit’s many prominent speakers. “We are in the transition phase where the boomer generation is giving way to leadership with the millennials and Gen X-ers, who might be taking over the reins, and they are perhaps more attuned to sustainability practices.”
Private banks in Asia are seizing this opportunity and playing a guiding role. DBS Private Bank, for example, is mapping out three pillars of ESG investment. The first, as Ho described, involves “using a lens to filter through the portfolio holdings to make sure that they at least abide by a certain framework of ESG and sustainability analysis.”
The initial framework everyone looks at is negative exclusion, excluding specific sectors, companies or practices that fail to meet ESG criteria, according to Ho. For instance, the MSCI ESG Screened Indices are designed to help institutional investors apply the most common exclusions to the underlying market cap benchmark, which can exclude companies associated with civilian and nuclear weapons, tobacco, palm oil, arctic oil and gas, and other controversial products, which are part of ESG assessment.
The second pillar involves introducing clients to responsible practices in their own businesses, for example, evaluating the upstream and downstream sustainability effects to make sure that they are at least future-proofing their businesses from ESG risks.
The third pillar, Ho notes, is introducing “avenues where they can create social impact”. Earlier this year, DBS and Heritas Capital announced the first close of the Asia Impact First Fund, raising over US$20 million. This was led by DBS and other impact-focused family offices, foundations, corporates and HNWIs, including Tsao Family Office, IMC Group, Ishk Tolaram Foundation, ANF Family Office, Pang Sze Khai (chairman of Octava Foundation and Octava Pte Ltd) and others.
However, ESG assessments present certain challenges in investment. Ho notes that ESG ratings are not as straightforward as credit ratings as they require assessing companies based on sustainability metrics. The negative impacts of poor sustainability practices are usually external and affect the world and environment as a whole, not just one specific company. Furthermore, the costs of these negative impacts are often not borne solely by the companies with low sustainability rankings.
“From DBS’ perspective, we are quite moderate in terms of sustainability push,” Ho states. “We recognized the trend, but we were not working under the false pretences that this was going to be the magic or silver bullet that would be the new analysis framework to drive alpha.”
He also notes that while green-labelled securities were often trading at higher premiums than their non-green counterparts and that sustainability is an important lens for analysis, the fundamentals and valuations still matter and, ultimately, drive security performance.
“We should look at what’s driving the negative performance in the short term,” Ho argues, “and continue to believe that these fundamentals underpinning the strategic direction will bring good performance in the long run.”