by Robert Mudra
In Devin Brown’s “Hobbit Lessons: A Map for Life’s Unexpected Journeys”, we learn five key life lessons drawn from J.R. R. Tolkien’s timeless story “The Hobbit”. These lessons are worth remembering and, in fact, may even help add meaning and value to your investment portfolio. When it comes to sustainable investing, the lessons are particularly fitting because sustainability, by definition, causes us to think deeply about the long-term—how we earn our wealth, what we do with it and the implications our investments have on the environment and society.
Hobbit Lesson 1
When adventure comes knocking, let it in—even if it makes you late for dinner, even if part of you says not to, despite what the neighbors might say. Saying yes to adventure will be good for you, and profitable too—though not in the way you might think” (P.32).
Developing a sustainable investment plan is like embarking on a new adventure. The global market is growing rapidly and there are numerous strategies to help you achieve your goals. Although it may take a little longer to identify and analyze material non-financial factors (and even make you late for dinner)—I believe that incorporating environmental, social and governance (ESG) analysis can reduce portfolio risk and generate sustainable, long-term returns.
Growth in SRI assets
According to the Global Sustainable Investment Review 2014, the world market for sustainable investing has grown from US$ 13.3 trillion in 2012 to US$ 21.4 trillion in assets by 2014. That’s a 26.9% compound annual growth rate (CAGR) in just the past two years. And, sustainable investment assets in Asia have grown at a 15.1% CAGR—from US$ 40 billion to US$ 53 billion over the same timeframe. In my view, this remarkable growth in assets illustrates both the value of a more robust investment decision-making process and the dawn of a new era in sustainable investing.
Sustainable investment strategies
Hobbit Lesson 2
Have your friends’ backs – someone has yours” (P.58).
As with any great adventure, there are a number of paths to choose from. The paths (or strategies) can demonstrate both a commitment to protect others from harm (e.g. having your friends’ backs) and opportunities for others to protect you from risk. GSIA reports that seven key sustainable investment strategies have emerged across the globe:
- Negative/exclusionary screening: the exclusion from a fund or portfolio of certain sectors, companies or practices based on specific ESG criteria;
- Positive/best-in-class screening: investment in sectors, companies or projects selected for positive ESG performance relative to industry peers;
- Norms-based screening: screening of investments against minimum standards of business practice based on international norms;
- Integration of ESG factors: the systematic and explicit inclusion by investment managers of environmental, social and governance factors into traditional financial analysis;
- Sustainability themed investing: investment in themes or assets specifically related to sustainability (for example clean energy, green technology or sustainable agriculture);
- Impact/community investing: targeted investments, typically made in private markets, aimed at solving social or environmental problems, and including community investing, where capital is specifically directed to traditionally underserved individuals or communities, as well as financing that is provided to businesses with a clear social or environmental purpose; and
- Corporate engagement and shareholder action: the use of shareholder power to influence corporate behavior, including through direct corporate engagement (i.e., communicating with senior management and/or boards of companies), filing or co-filing shareholder proposals, and proxy voting that is guided by comprehensive ESG guidelines.
Among these investment strategies, GSIA reports that the largest strategy globally is negative screening/exclusions (US$ 14.4 trillion), followed by ESG integration (US 12.9 trillion) and corporate engagement/shareholder action (US$7trillion). Negative screening is the largest strategy in Europe and ESG integration dominates in the United States, Australia/New Zealand and Asia.
I believe that incorporating environmental, social and governance (ESG) analysis can reduce portfolio risk and generate sustainable, long-term returns.
The Association for Sustainable & Responsible Investment in Asia (ASrIA) reports that the top three investment strategies in Asia (ex-Japan) are ESG integration (US$ 23.4 million), negative/exclusionary screening (US$ 16.5 million) and sustainably themed investing (US$ 2.0 million) in their 2014 Asia Sustainable Investment Review.
Importantly, Asian investors cite fiduciary duty, financial opportunity and risk management as their primary motivations for sustainable investing. Which brings us to Brown’s third lesson:
Hobbit Lesson 3
Be fond of waistcoats, pocket handkerchiefs and even Arkenstones (just don’t let them become too precious)” (P.82).
In short, it’s okay to seek financial opportunity and enjoy “fancy” or valuable things. But Brown draws out Tolkien’s theme and warns us that, “…if we let our possessions become too important, if we let them become too precious, they will eventually come to possess us and bring about our downfall”.
Hobbit Lesson 4
Remember not all that is gold glitters (in fact, life’s real treasures are quite ordinary looking)” (P.100).
Emerging themes in Asia
Interestingly, the data shows that sustainability-themed investment strategies have had the highest asset growth rates—both globally and in Asia. ASrIA reports that game-changing issues like climate change mitigation are driving many countries in Asia to implement more supportive regulatory landscapes for environmentally focused investments like clean tech and renewable energy. The four key themes emerging in Asia include new opportunities for (1) clean energy (2) green bonds (3) conservation finance and (4) impact investing. The scale of Asia’s economic growth is creating incredible financial wealth but inevitably depletes natural resources and increases the risk of pollution. Therefore, it’s imperative that we protect these truly irreplaceable and invaluable treasures.
Putting it in perspective
Part of the adventure of sustainable investing is the opportunity to earn both financial and social returns while addressing the world’s most significant challenges. It might seem hard to believe that your investments can make a global difference, but remember this final Hobbit lesson:
Hobbit Lesson 5
Recognize you are only a little fellow in a wide world (but still an important part of a larger story)”(P.122).
ASrIA reports that Malaysia, Hong Kong, South Korea and Singapore are the largest Asian markets for sustainable investments. In addition, Indonesia, Singapore and Hong Kong were the fastest growing markets since 2011. As global and Asian SRI markets continue to grow there will undoubtedly be new risks, but there will also be exciting new opportunities for investors. BM