Increased investor focus on environmental, social and governance metrics is driving a race to the top as companies look to raise their ESG profiles.
Is ESG investing on the brink of becoming a bubble? Some investors wonder. They look at soaring clean energy stocks and palpable investor enthusiasm for electric cars and question whether ESG investing is a fad. We really don’t think so.
The concern reflects a confusion – combining two different strategies, ESG investing and investing in sustainability themes.
ESG investing represents a lasting adoption of a new investing methodology that can strengthen businesses and boost portfolio returns by considering material E, S and G metrics.
By contrast, companies that are emerging to address sustainability trends are prone to rise and fall with market sentiment – both from periods of rapid growth and correction from elevated valuations.
ESG investing vs investing in sustainability
ESG investing is an investment strategy in which environmental, social and governance factors are integrated into the due diligence and financial analysis of investment managers. Companies that focus on ESG factors tend to have better and more stable long-term performance.
On the other hand, investing in sustainability themes involves investing in companies, technologies and projects that target specific sustainability themes and are set to grow rapidly and consistently.
In the UAE, 80 per cent of investors know what sustainable investing is, 80 per cent expressed an interest in ESG investments and 40 per cent of those who had not yet invested in sustainable solutions said they planned to do so in the future, according to a survey by Standard Chartered. Also, Saudi Arabia plans to deploy 50 per cent of its investments in renewable and sustainable power sources.
Companies that focus on ESG factors tend to have better and more stable long-term performance
Tara Smyth,
region head, Middle East, North Africa and Turkey, JP Morgan Private Bank
How to spot an investing bubble
Spotting a bubble is never simple, but generally there are the following patterns:
- A narrative of opportunity and rapid growth that persuades people that they need to “get in now”
- Favourable financial conditions, often accompanied by government support
- Visible, rapid growth
Some sustainability themes have recently shown early warning signs of a bubble and we expect this pattern will likely repeat. Periods of investor exuberance and retreat will come and go throughout the decade, even as sustainability themes become increasingly entrenched in the global economy.
A shift in perspective
In contrast to sustainability trends that may lead to bubble-like valuations, ESG is not a trend to be investing in. It’s something entirely different – an evolution of investment strategy itself.
In essence, that’s why we believe ESG investing cannot become a bubble. There has been a shift in how companies and investors view ESG factors and the importance they attach to them relative to other investing considerations.
Companies similarly focus on material ESG issues. Indeed, many firms are looking to do more to incorporate ESG considerations into their business strategies – to both strengthen their bottom lines and raise their current ESG profiles with investors.
We do see some risk of “greenwashing” where companies act to create the illusion (but not the reality) of positive ESG change. But, on the whole, we see a virtuous cycle of rising shareholder expectations driving a race to the top among companies with the highest ESG ratings. These companies then reap the rewards, which could include a better share price performance relative to their peers.
A modest boost to risk-adjusted returns
When investors focus on material ESG issues, they can deliver stronger results. Research also shows that incorporating ESG factors appears to provide a modest boost to returns and risk-adjusted performance.
Amid growing evidence of the effectiveness of ESG investing, asset managers who ignore these issues may find themselves less and less able to attract and retain assets.
Talk of a bubble in ESG investing underestimates the hold these issues now have on the finance industry. We believe the changes in corporate and investor attitudes towards ESG investing are irreversible.
Investing in sustainability themes can temporarily become a bubble, but it’s a different story for ESG investing.
It’s not surprising that many people have combined two separate subjects, ESG investing and sustainability themes. They do cover much of the same territory after all. But the differences between them are significant.
While sustainability themes can deliver above-market returns while aligning investor capital to key impact areas, they can temporarily lead to a market bubble. ESG investing, on the other hand, represents a shift in investment methodology – well beyond any potential market bubble.
Tara Smyth is region head for the Middle East, North Africa and Turkey at JP Morgan Private Bank.
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
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The President's Cake
Director: Hasan Hadi
Starring: Baneen Ahmad Nayyef, Waheed Thabet Khreibat, Sajad Mohamad Qasem
Rating: 4/5
What can victims do?
Always use only regulated platforms
Stop all transactions and communication on suspicion
Save all evidence (screenshots, chat logs, transaction IDs)
Report to local authorities
Warn others to prevent further harm
Courtesy: Crystal Intelligence
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COMPANY PROFILE
Name: Qyubic
Started: October 2023
Founder: Namrata Raina
Based: Dubai
Sector: E-commerce
Current number of staff: 10
Investment stage: Pre-seed
Initial investment: Undisclosed
War 2
Director: Ayan Mukerji
Stars: Hrithik Roshan, NTR, Kiara Advani, Ashutosh Rana
Rating: 2/5
The Bio
Favourite vegetable: “I really like the taste of the beetroot, the potatoes and the eggplant we are producing.”
Holiday destination: “I like Paris very much, it’s a city very close to my heart.”
Book: “Das Kapital, by Karl Marx. I am not a communist, but there are a lot of lessons for the capitalist system, if you let it get out of control, and humanity.”
Musician: “I like very much Fairuz, the Lebanese singer, and the other is Umm Kulthum. Fairuz is for listening to in the morning, Umm Kulthum for the night.”
UAE v Ireland
1st ODI, UAE win by 6 wickets
2nd ODI, January 12
3rd ODI, January 14
4th ODI, January 16
The Bio
Hometown: Bogota, Colombia
Favourite place to relax in UAE: the desert around Al Mleiha in Sharjah or the eastern mangroves in Abu Dhabi
The one book everyone should read: 100 Years of Solitude by Gabriel Garcia Marquez. It will make your mind fly
Favourite documentary: Chasing Coral by Jeff Orlowski. It's a good reality check about one of the most valued ecosystems for humanity
