Infusing investment with sustainability

Chinese investors jump on the global ESG bandwagon to rebuild economies with lessons learnt during COVID-19 pandemic

Clouds are said to have a silver lining, but could "ESG" prove to be the golden edge to the dark COVID-19 cloud, transmuting the pre-pandemic profit craze of investors into a heart-felt desire for socially responsible, environmentally conscious investing?

Yang Yuebin, associate director of Sino-French joint venture AXA SPDB Asset Managers, believes so. He manages a 1.9 billion yuan ($271.2 million) fund that prefers financial assets offering sustainable returns with focus on ESG.

For the uninitiated, ESG refers to environment, social and governance－three fields that are receiving intense attention of COVID-19-chastened investors and fund managers who have to make quick, sensible decisions in liquidity-flush, stimulus-happy economies worldwide.

"The COVID-19 pandemic shows ESG matters more than ever," said Eric Usher, head of the UNEP Finance Initiative.

Agreed Yang. "Value investing" is the philosophy that informs his fund management now. In this regard, Yang is not alone. Value investing is a trend gathering momentum in China and the rest of the world.

Yang and his ilk believe investors have the power to influence equity issuers to value sustainable development.

Yang deeply believes that investors should "choose investment products that benefit ESG". That approach, he said, helps mitigate market uncertainty and limits volatility in a world made turbulent by the economic fallout of the pandemic.

"Like a commander in an army, the fund manager should take responsibility for the valuation of returns and risks, and the ESG label is like an insurance to mitigate risks when we discount cash flows of the equities," said Yang.

These days, he is busy preparing for new offers of funds that focus on ESG-labeled assets.

There is a good reason behind his preference. When global markets were disrupted by COVID-19, listed companies with higher ESG ratings outperformed their peers over the same period. For instance, stock indices such as the S&P 500 ESG index and the MSCI's emerging markets ESG leaders index rose more than other well-known indices.

A BlackRock report said that in the first quarter of this year, investment flows into global sustainable open-ended funds were 41 percent higher from a year earlier.

Market data provider Morningstar reported that almost $10 billion flowed into sustainable open-end mutual funds and exchange-traded funds in the United States in the first three months, more than half the 2019 total.

Usher said investors and fund managers are underlining the significance of policies that can mitigate climate change impacts, reduce economic inequality in the post-pandemic era and improve the resilience of corporations through advanced governance.

In China, investments under the theme of "sustainability" gained momentum during the COVID-19 pandemic. Issuance of bonds with the "green" label had tripled in April compared with March, according to a report from the Climate Bonds Initiative (CBI), an international non-profit institute.

Chinese green bond issuers already topped the global green bond market in 2019, recording a total of $55.8 billion in offerings in both onshore and offshore bond markets, up by 33 percent from 2018, the report said.

A key issue for investors, however, is to figure out if the bonds or shares are really "green" or "ESG-related", and whether their investment can support sustainable development of the companies and society, said analysts.