The past two years have seen many global financial markets take quite a hit. Attempting to recover from the repercussions of the COVID-19 pandemic, the current state of major financial indexes in 2022 is a veritable sea of red. By no major fault of their own, respective governments are presently working to combat inflation and the rising cost of living.
The former results from necessary federal stimulus packages and grants provided to help citizens get by during the pandemic. The latter is a consequence of geopolitical and macroeconomic factors such as economic sanctions and supply shortages. Regardless, these issues have proven that the investing power of the average dollar has shrunk significantly in the current day and age.
In these times of uncertainty, market pundits are looking toward more robust value-based investments such as ESG, SRI, and impact investing. Compared to the established models of growth investing that have flooded financial headlines for the past half a decade, value-based investing turns its eyes towards stocks that are currently undervalued and out of favour. Betting on the market’s opinion and strong fundamentals, value investments are predicated on the idea of paying less for a set of future cash flows associated with higher expected returns. Yet, even in value-based investments, sustainable and responsible ventures have caught the eye of market experts as the next financial “unicorn.”
Differences Between SRI And ESG
There’s a lot to unpack here, so let’s look at the differences between SRI and ESG.
Socially Responsible Investments (SRI) work on excluding or excluding companies based on specific criteria. Potential investments are screened and shortlisted based on a set of positive yardsticks, while companies that possess negative factors are eliminated from the portfolio. SRI functions as a way to reassess portfolios and take stock of each company’s business model. By condoning or condemning these businesses, SRI leverages a company’s values and principles in the hope that it will provide returns.
On the other hand, investments assessed through a set of Environmental, Social, and Governance (ESG) requirements, are put through a broader set of due diligence questions. As opposed to SRI, this approach questions how ESG factors might impact an investment’s performance, both positively and negatively. It analyses how the business’s values and actions align with ESG factors, resulting in a bottom-line assessment of profitability and sustainability. An example of this assessment might be a fast-moving consumer goods company committed to using recycled materials for packaging, boasting a low or even neutral carbon footprint. A company like this would undoubtedly be a boon in the eyes of ESG investments.
What Is Impact Investing?
While both these approaches entail looking at pre-existing companies with a strong business record, a more novel approach entails investing in organisations and funds that can generate a measurable and beneficial social or environmental impact. This approach, known as Impact Investing, gives rise to the potential for large-scale change. Unlike the two investment models mentioned above, impact investments prioritise nascent and upcoming efforts rather than ones already taken by businesses.
Closer to home in ASEAN, the ideas of SRI have strong roots in the investment community. As early as 2016, the value of sustainable bonds and sukuk had risen a whopping 198% over four years. ESG value propositions have also seen a significant rise in investments, particularly in renewable energy, fossil fuels, and electricity networks. With considerable investments going towards building infrastructure, corporations are moving into long-term ESG value propositions.
Working hand in hand with governments, the understanding between private investors and policymakers is one of long-term cooperation. Sustainability, a commitment to low-carbon, and combined efforts to combat climate change have been driving forces in ESG investments.
Sustainable Investments Continue To Grow In ASEAN
As much as a new normal has been established, ASEAN countries continue to recover from the impact of COVID-19. By no means a straightforward journey, endeavours in the realm of sustainable investments within the region are making substantial headway — to the benefit of everyone.
