ESG Investing: Win-Win Method? [Chills 23 with endowus]
Many millennials nowadays are starting to pay more attention to environmental, social and governance (ESG) issues and this phenomenon has given rise to a new form of investing known as ESG investing. What are the factors one should consider in ESG investing and how can investors make sure that they do well in the market while doing good in the world at the same time? Discover the world of ESG investing in this week’s episode of Chills with TFC as Samuel from Endowus tells us more!
The general idea of ESG investing is to invest in companies which are committed to be environmentally conscious, socially conscious and/or have good governance. Some of the common ESG issues may include the following: reducing carbon footprint, renewable energy, income inequality, gender diversity, employee welfare and many more.
Chills 23 goes deep into ESG investing as Samuel and Reggie discuss how ESG investing can actually help the world, some factors to take note of when selecting ESG companies to invest in and some ESG investment strategies to consider. Samuel also shares some useful resources for ESG investors (ever heard of an ESG calculator?) so everyone should definitely check out this episode, especially if you want to make a difference in the world with your investments!
Samuel: People who think they have a lot of money think that they have more wisdom or they think they can predict the future, which is like completely uncorrelated. Predicting the future has nothing to do with riches or intellect. It’s just something that human beings are really bad at. I think humility is the first thing I look at when I look at an investor. Good investors have humility. You don’t have that, you cannot be a good investor.
Reggie: Nice. I’m sensing a lot of humility here.
Samuel: Humility because I failed so many times, I lost a lot of money in my investments. I had to be humble because I didn’t… it was a long winding road to where I got to.
Expand Full Transcript
Reggie: ESG (Environmental, Social, and Governance) Investing is catching fire! Apparently there is data showing that millennials are increasingly concerned about ESG. We care about companies beyond just making money. We want to know where are they putting their profits, how well are they taking care of their crew and what kind of environmental impacts does the business has and how are they rectifying them? All that has spilled over into our investments but the question is still can ESG Investing actually be more profitable than traditional broad-based market index, or is it just another fad?
Welcome to another Chills with TFC session. In this series, we hope to bring on interesting, relevant people to help us learn better from various perspectives. Life is not always about learning from people that you already agree with. Perspectives shape a rounder thinker in our pursuit of the life we love while managing our finances well.
Our guest today has taken a different route from his team to champion for ESG Investing. From what I’ve gathered, not everyone on his school actually agrees with his direction. But this guy is going to prove it to them and we had to have him on. You are not unfamiliar with the company. They are pretty synonymous with CPF Investing, but they want to go further. I’m happy to introduce you to Samuel Rhee from Endowus.
What is your core investment ideologies now?
Samuel: Look, I think everybody is different. That’s the first thing for sure. Because… me, I have a lot of experience investing. How I invest and what my philosophy would be, would be very different from the average uncle or auntie in Singapore who are working and have never really read a finance book or invested before, but are thinking about investing for the first time. Those guys will be very different from a white collar professional who’s dabbled in stocks, doing a little bit of Bitcoin, reading these financial blogs and he’s much more educated. So he will be a different investor. And the other thing is I really believe that everybody’s personal financial circumstances are different. Their goals in life are different, why they’re investing is different. Having this blanket statement of “This is How You Should Invest” is something that I’m very uncomfortable with sharing. I can share how I invest. I put all my money in Endowus and I just manage it outside on that platform, that amazing platform. I am my first biggest client. I buy what I sell. I love that.
Reggie: I get what you’re saying.
Samuel: But the reason is because I just don’t have time these days, when you’re building a business. I just don’t have enough time. It’s just… if I were a full-time professional investor, I would do it very differently. I would pick some stocks that I really like, I would dabble in some other new investment ideas. But right now I just don’t have time, I just go passive. I have a core asset allocation. We just launched ESG portfolio so I allocated immediately to the ESG portfolios because I found these funds the best that I could find and we built a portfolio around this. I was like, okay… I got to do this because this is something that I really believe in. I’ll go into this and allocate maybe 20%, 30% of my portfolio into that. And then, if there’s like really good sectorial funds or thematic funds, I would allocate to that.
But I’ve kind of given up on single stocks for awhile because I just don’t have the time to control it or keep track of it. I don’t want to be like checking the stock price every day or every moment. I guess you know what it is. That’s what I do. I have a little bit of exposure to crypto, but not really active there.
Reggie: Just having some fun, just treating it like an option for the future.
Samuel: Actually that’s what you should do. Me… is very different story. I had a friend that I was just helping out and investing in his company and that company did some ICO (Initial Coin Offering) token issuances and I got some for free. So that’s why I’ve explored and it has gone up like a hundred X. But I have really tiny exposure so it doesn’t mean much. I do follow the space, I think it’s really fun and exciting. But I wouldn’t allocate a huge piece of my assets in there.
Reggie: There’s so much innovation going on and all the interesting stuff. That would be for another day. A lot of those stuff…
Samuel: But exciting and fun, and important as well. It has long lasting implications. Everybody should keep track of it at least, even if they’re not invested.
Reggie: We’re going to be launching a podcast just for that.
Samuel: Oh really? So exciting.
Reggie: We’re going to do a whole thing just for them. We may sell NFT in every episode. Just like vibing with that, just kind playing around and see what works. Just kind of experimenting the whole thing and you never know. So stay tuned guys.
Samuel: This NFT (Non-fungible Token) for me is good. This podcast, this episode… hopefully it’s the best selling and highest value on the open market. Buy small clips of it, break it out, sell more…
Reggie: All the good juices. Nice, good stuff. You talked about ESG Investing. I think ESG is like multiple things put together. For all of our audience, what is ESG then?
Samuel: I don’t know these days. There’s so many definitions of ESG.
Reggie: I know!
Samuel: The sustainable investing which is the broad umbrella, within that ESG is another broad classification. ESG stands for environment, social, governance. Those are the three big pillars of responsible, sustainable investing. Within that you have socially responsible investing, which is values-driven. If you’re religious or you don’t want these sin stocks, you don’t believe in like violence, you take those out.
Reggie: No weapons, no alcohol, none of those things.
Samuel: Or porn, or alcohol or…
Reggie: Well you can buy porn stocks?
Samuel: There are apparently, I see it mentioned quite a lot. I don’t know personally.
Reggie: I don’t know.
Samuel: But I hear there are some porn exposure around. But porn, pork… all these things, you remove those and that’s a values driven negative screening investment.
Reggie: So you remove all those things because it’s not aligned with your beliefs.
Samuel: Precisely. So that’s actually the lowest, easiest way to do things. A lot of indexes or passive ESG strategies and like ETFs (Exchange-traded Funds) use this strategy. But it’s like the most basic form and it’s actually been proven not to be that effective in driving change, having a meaningful social impact. People have been actually taking much more active engagement. Active investing in ESG means you actually find companies who are often best in class, companies who are environmentally conscious, or socially conscious, or has good governance. You invest in those companies.
The other way you can do it is actually engaging companies that have potential, or have meaningful size, but can actually change and become better governance. The companies run better or they’re more focused on environmental or social issues, so they actually can make an impact in society. They get actively engaged and in equities you become a shareholder, you vote in the AGM, you engage the management, you change them, you help them to become better companies. In bonds, in fixed income, you lend them money. Similarly as a lender, you have certain powers and you have certain influence over the management. So you’re trying to influence them to do better. I think ESG is a very broad space, ill-defined. It’s very difficult to define it, but basically if you’re trying to do good and do well at the same time, meaning that you’re trying to change the world for better and you’re investing for good returns and you want to marry the two… that’s what ESG Investing is all about.
The other side is actually charitable giving, just giving money to help a good cause. But you don’t expect anything in return. Traditional investing is just focused on return, it doesn’t matter how you generate the returns. You can invest in all the evils and porn and everything and marijuana and make money no matter what. That’s the other two extreme. But in the middle is trying to do good and trying to do well at the same time. It’s about returns and it’s about doing good.
Reggie: That sounds amazing. It sounds well and good and you invest in a good social cause, you buy companies, or you buy funds that pick companies that are doing good stuff and align with your beliefs and all those kind of stuff. But when you buy things in the secondary markets, in the stock market or in the bond market, the money does not actually directly flow into these companies. As a retail investor is so small, my impact is so small… how do I then go beyond that as a marketing thing, like really having that impact? Just kind of help us paint that picture of… if I invest in an ESG strategy, how my work translates into the real impact?
Samuel: It’s tough to really feel it immediately. But I guess this is a really long-term trend and we’re at the very early stages of this change. I think in the 90s as I said, early forms of this investment was really about sieving out the bad companies and trying to invest in the good companies, but it didn’t really make a difference at all. Volkswagen, the environmental calamity that they caused or ExxonMobil, it didn’t make a difference. So I get it… it’s for the retail investor especially when you’re buying companies directly, you’re not gonna have any kind of influence or any kind of an impact.
And that’s why I think collective investment schemes as what the original name, official financial name is for a fund… is to collect and pool funds together and invest for a good cause. When people direct their retail investment money from single stocks or just regular funds into ESG funds, what you’re effectively doing is pooling everybody’s money and making an impact because you’re going to be bigger. So those fund managers… we work with 5, 6, 7 fund managers who are the global leaders in this, they’ve been doing this for decades when nobody really took notice, when they couldn’t gather any money from anybody, they were like struggling, they were startups.
And companies like Neurover, or in France and Boston there’s companies like Robeco, which is a Dutch company… number one rated sustainable investing company, but no one has heard of it in Singapore. But Endowus finally bought it into Singapore… another marketing pitch for us. Basically these kind of guys exist and they’re actually making the cutting edge kind of innovation in this space. What they’re saying is that… hey, if you pull money and these guys now have billions, if not tens of billions and the companies are taking notice. I think the big C change happened last year, with COVID, with social issues in the US, globally, inequality, everything… companies are much more aware that people want to make a difference. They’re voting with their money. You see all the Reddit and the US game stuff, WallStreetBets and all that. These things are stonks. These things actually are making an impact and I think the companies are taking notice.
The fund management companies are taking notice and that’s a good thing. It will take time to really make a meaningful impact, but is driving companies to change their policies on how they look at climate and what their impact is on the climate. How they take care of their stakeholders… not just their financial shareholders but stakeholders like people, their own employees, their welfare. The supply chain that outsource partner companies, how are they treating them, the environmental impact of their manufacturing or primary excavation of resources. All of these things are being taken into account and they’re really making progress here. We just want to push them a little bit, nudge them even further along this line by voting with our money and that’s what retail investors effectively are doing. It’s perfectly fine if you say, “Hey, I don’t care about this. ESG is not for me, I just want to make money.” That’s fine!
Everyone’s different as I said and some people are gonna resonate with this and say, “Hey, I’m a millennial. I want to be…”
Reggie: Tagging millennials again. Millennials do more than social-driven stuff.
Samuel: But you know what? It is interesting because I have Gen Z kids. I’m older. I’m older. I’m not a millennial. We did a survey of a thousand plus people on this ESG and sustainable investing. It was funny. Millennials are the most purpose-driven, they are the most interested!
Reggie: Wow guys, good stuff! #goodstuffman
Samuel: I love millennials. They are actually force for good, force for change.
They are actually putting their words into action. They’re voting with their money now and they’re getting more and more of it. The millennials are going to be either handed down or earning a big piece of the global wealth. So they’re going to vote with their money and it’s important how they vote. I think they’re going to vote in the right way. I’m really encouraged by the survey and what’s happening.
Reggie: That’s pretty cool.
Samuel: That’s super cool.
Reggie: Shout out to millennials. So then what are some of these major themes in the ESG space then? So many things that millennials are concerned about and fundamentally we have to pick certain sectors and all those kinds of stuff. What are some major sectors that you’re seeing that is interesting in the ESG space?
Samuel: I think there’s two big buckets. One is thematic and then there’s core ESG. When I say core ESG, it is the main pillars of environmental, social and governance. Thematic is like fluffy stuff… like water, robotics, renewable energy, but it’s ill-defined. Meaning that random companies go into this renewable bucket. Water… let’s not bring up HyFlux, it’s water but it’s not really making a difference. They actually ruined a lot of people’s lives for example. Having that holistic view of not just playing a theme or the flavor of the month, but really delving into how companies and these investors are looking at implementing E, the S and the G.
Now everybody right now is focused on E. That’s what COVID did, that’s what people are more familiar with, global warming, all of these things. In our survey as well, 93% plus of people said they resonate with environmental issues. 93%!
Samuel: This is like everybody, from 20 year olds to 80 year olds. So environmental is definitely key. Historically the way ESG investors have focused on is governance. Proxy voting, are they doing the right thing, are they siphoning money? Governance was really important. We shifted to environment. I think the next wave and many people are already talking about it is social because of the things happening in the US, income inequality, social issues are coming to the fore, ethnic diversity, gender diversity, all these things I think are things that are becoming much more relevant and important to people.
How do we implement social? It’s difficult. You have to come up with the right criteria.
Reggie: What are some of these criteria then? Exactly like what you point out, in a thematic stuff it is like big buckets and random things just go into that theme. But if we go into environment, what are some core metrices that funds look at to determine that, “oh, this company is actually good and core, and can be part of our core fund based on environmental factors.”
Samuel: Yes. I think that increasingly we’re seeing better definition. They call this difficult word taxonomy, which is defining things…
Reggie: What metrics to use?
Samuel: What metrics do you use to measure progress and to rank these companies or score companies? That’s really important and there’s been tremendous progress. One of the major initiatives came from the UN (United Nations). PRI is the Principles for Responsible Investing. More than 3,000 financial companies, including asset managers and pension funds and investors have become signatories and combined, they manage over a hundred trillion dollars of assets. It’s a bit of a fad because if you’re not a UN PRI signatory, then you’re like, you’re not kosher. You’re not really…
Reggie: You’re not kosher!
Samuel: So everybody is a signatory, but they have a ranking now. Fund managers are ranked A+A, all of our fund managers are ranked AOA+, most of them A+. Then they look at how they measure and what are the criteria for investing. Environment is much more well-defined because it’s carbon emissions, it’s what kind of water pollutions that you’re causing from your manufacturing sites, all these things are much more measurable.
Environmental measures I think are much more advanced, but the social as we discussed… social is much more fluffy. I think that one’s going to be much more difficult but the most basic ones, things like how you treat your employees, gender diversity in the board or in your employment. Like we have more than half our board as females. She includes the board observers, it’s more than 17%. That should matter.
I did a webinar yesterday with Mirova and Schroders from London and Boston dialing in to talk about our equity strategy, and Nathalie Wallace who’s the head of ESG Strategy for Mirova over in the US in Boston. She was previously the Head of Strategy for State Street Global Advisors, which is one of the biggest State Street providers, SPDR ETFs. She was saying that, “Hey, I can’t join your webinar unless you have 50% female speakers.” I was like, “Wow!” But that’s good. Definitely, we already had two each so it was perfect for us. But she said that and I was like, “Yeah! You actually need to be intentional about this.”
You actually need to say this is what we need to do: not joining webinars if women are not represented properly in the US, if ethnic minorities are not represented properly, stop Asian hate right now, Asian Americans have been beaten up in the streets…. it’s ridiculous in this day and age, in an advanced nation like that, these things are happening. I think we definitely have to have clear definition of what these criteria are and really hold people accountable to it.
Reggie: All that being said good and well and all the interesting lovey-dovey stuff… but are we going to make money out of this? Are we going to beat the market out of this? It’s all about the returns! That’s why we’re tuning in here today! Are we going to run beyond the market in that sense?
Samuel: I’m worried because we had an amazing return in the past 12, 18 months. All the ESG strategists blew the lights out, all these thematic guys blew the lights out. They were applied 20%, 30% when the market was up 10%, 13%, 15%. So it’s done well. Once again, I’m going to go back to that mantra that I’m not going to try to predict the future because no one can. It’s not about whether they’re going to continue to do well or not because no one knows. I can tell you something and try to sell you something, but it might not.
I’m not going to try to predict and say that these things are going to be better performing than your standard market beta passive strategies. But what I can say is that, I think the world is changing that in the past, ESG strategies did not necessarily give you better returns especially in public markets. In the private markets, all the studies show that actually it does better and more recent studies seem to suggest that there is a positive correlation between higher ESG scoring companies and their returns in financial markets. The studies and… I haven’t looked at all the studies but if you look at the fund managers and all the studies, academic papers, they tend to agree that it is improving.
The big question is what’s going to happen in the future? If you think logically and just go back down to the basics, these are companies that are going to be more kinder to their employees. So you’re going to have better retention. People are employees that are happier, who are better taken care of, who are going to have more loyalty to the company, who are going to be working more efficiently, who are going to come up with more creative ideas and they work at shops where customers come in and the customer service people are going to be happier and treating their customers better. The customer gets a better experience, the manufacturing is cleaner, it’s safer. They’re using materials that are better for our skin and for our health. We’re going to choose those products that are going to be healthier and better for us and for our children.
Isn’t it logical to think that these companies are going to be more environmentally conscious, these companies who take care of their employees better, who are going to produce products and services that are better and more joyful and a better experience for our customers. Aren’t those companies going to win in the end?
If you think from that logic, I think it’s very logical to think that if we invest in these companies and some of them is published, some of these are tech companies that did really well during COVID… COVID beneficiaries and these guys. Maybe it will come back a little bit, but really long-term if you stretch out to 5, 10 years. Predicting one month, one day, is possible, doesn’t make any sense. It’s easier to look at the long-term trends and say, “Over 5 years or 10 years, the trend of ESG if we pick those companies that are doing those things, is it going to be better for our returns or worse?” I think it’s going to be better. That’s my bet and that’s why ESG investing is important.
But the other thing is that if you hold values and you think these things are important, you don’t have to necessarily sacrifice returns. Is it going to be a drag on returns to the first question and it probably isn’t? You can at least meet market returns and if you’re lucky and if these trends play out, then you’ll do better than the market returns. So why don’t you do good and do well in terms of returns anyway.
Reggie: The base understanding is the market is already pricing a little bit of extra stuff in this space.
Samuel: You put words in my mouth, I didn’t say that.
Reggie: At least what I’m hearing is the market has outperformed a little bit in terms of ESG versus the broad beta market. It’s doing better and some of these composites may be a little bit in the bubblish space based on what you’re saying. But you believe that the underlying businesses will catch up with that kind of price growth because of all the good things that they’re doing, and you believe that the broader market wants these kind of stuff better… better quality stuff, better service, more socially better products and all this kind of stuff. So that’s the base case.
Samuel: Captures the imagination of consumers in terms of doing good with their money.
Reggie: Good stuff! That’s the base idea.
Samuel: I think what’s important though is that ESG investing is a very active strategy.
Reggie: How active do we rotate through these kinds of companies? Because from a composite level, are we going for market weightage or are we going for ESG score weightage? How does that work in this space?
Samuel: I think it’s really difficult as an individual investor to do this well, because in our survey we asked them. A lot of people are interested… 90% in these issues, they want to allocate money. They said anything between 10% to 50%. Mostly in that range and the average was maybe 20%, 30%, which is a significant allocation.
But the two problems exist. One is that they don’t feel that they know enough or they don’t feel they are comfortable. The second thing is that even if they are and they’re looking for stuff, they can’t find anything.
Reggie: There’s so much extra work that you need to do to understand this.
Samuel: Even if you want to, there’s no one exposure or one place where you can just buy a strategy. That’s what we try to solve it in Endowus, is to build a portfolio that’s ready-made. We’ve already done all the hard work of looking at all the hundreds of funds out there globally. Most of them not even available here so we have to bring it into Singapore. It took us 6 to 9 months to actually execute. And finally, we have a portfolio across equities and fixed income… first in Singapore. We have some 100% equity things, not really ESG but purportedly there’s like passive ETF strategies, but it’s really pretty crap.
Equities, fixed income, best-in-class funds, exposure to broad sustainability, including climate and every sector… building that portfolio was tough, but we got it out and it’s available to retail investors most importantly. This space was mostly done by institutional investors like Sovereign Wealth Funds. GIC would do this, but retail investors is impossible. We made this possible. The reason we did that was because we want people to have that choice. We don’t want everybody to go into ESG, we don’t want everybody to put a 100% of their assets in ESG. But if they want to put 20%, 30%, 50%, we should give them that choice. I think that was the first thing. What is the right number? I don’t know. Everybody’s different. I’m willing to sacrifice a little bit of return to do good. I can allocate 100% of my portfolio, fine. But I’m not, I’m a little bit risky, I’m really like you…
Reggie: I want returns! Yeah!
Samuel: Then I’m going to allocate maybe 10% and anything in between is fine. But the average seems to be 20%, 30% of the allocation. The other thing is that as an active strategy, you’re going to be very concentrated. If you look at the traditional investment kind of philosophies, broad diversification is a good thing for us especially as individual investors. Being too concentrated is probably higher risk. If you’re able to stomach that risk and you’re okay with it, and you want to do that, that’s fine as well. But if you want diversification, then I would say that the 20%, 30% or below allocation is right and then you keep most of your assets still in that broad, passive, globally diversified kind of portfolio, which is the core portfolios. Even within Endowus, we have core portfolios and then we have the ESG portfolios.
Reggie: Walk me through a little bit about the active process and how is the ESG fund active in that sense? What do we do? How do you choose to circulate around and change your stocks? How does that work?
Samuel: There’s passive versus active, there’s two layers. One is at the asset allocation level. Our asset allocation is actually passive and strategic. We don’t move things around because the economy’s doing well or not doing well, random factors don’t drive our asset allocation. We try to keep it as broadly diversified and global sectorally neutral if we can as much as possible. Our core portfolios are like that, our ESG portfolios are similarly strategically passive asset allocation.
At the individual stock level, securities level, that’s where the active selection kicks in. In ESG, by definition, you’re active in terms of selection because you’ve already taken out the bad companies. Negative selection already means you are active, so you can create a negative index and be passive to that index. But that index itself is an active decision. See what I mean?
So passive is being used around in various different ways and used in a wrong way. I think ESG is all active, there’s no passive, truly passive. That’s the first thing. Secondly, if you’re going to be active, then how do you implement that active strategy… that was your specific question. As I said, when you take out the negatives as an active first step, the second step is among those left. Which ones are the best companies and you want to allocate to those best environmental school company, social company, or governance company… then you want to do that.
Some would focus only on social. Say I want to be a socially responsible investor, I want a social impact strategy. Then you’re going to focus and overweight the social factors and social scores. If you’re an environmental fund or a climate fund, you’re going to focus primarily on the environmental and climate.
So again, the sector and which ones you actively allocate to is another active decision. Within that, you’re going to have a scoring mechanism. All the criteria that I mentioned, the carbon footprint, water, all the air pollution, all the things that you look at, each company does it differently. You would allocate a certain portion into each of those criteria. You score it, you analyze, you evaluate, you score and then you allocate, you size the bets in that way.
Now, the final piece is there are guys who are active in choosing, selecting stocks. And then there are guys who are active in the managing of the companies. As I said, there are investors who actively engage the companies and try to improve that. They think by doing that, you can generate alpha. You’re an activist investor, precisely. You’re an activist, active investor. There are gradations and different levels of activeness, and different ways in which you can implement your active strategies. We have the whole spectrum within our portfolios.
Reggie: Most of the ESG funds, they choose the companies based on the ESG score. Is what I’m getting? So it does not matter the underlying market cap or the business, it is really just based on the score and then they will choose their composite from there.
Samuel: The ones we like, we prefer if they use their own in-house proprietary measures to score that. Using MSCI or Sustainalytics, broad third party indexes, it’s not as sophisticated, it’s not as well done. Those ETFs that use these kinds of passive, third party strategies are pretty poor in their record, track record. They don’t even vote even, they’re not very active in involving and improving.
Reggie: They’re just joining the hype.
Samuel: They call it greenwashing or fad, following the fad. People buy these ETFs. But a lot of them, I just feel are not up to scratch. We’ve chosen only those that have active in-house proprietary research, an actual team that does ESG and know how to do it. They don’t just talk about it and have random investors that have no track record in ESG. Picking these companies… there’s actually guys who are really well-researched, documented, have a great system in place and they’re scoring well, and they’re investing in those companies.
Reggie: ESG as an investing theme, how long has it been around? What is the kind of track records that we’re looking at? Or is it just a very young thing that’s just recently caught on fire because you did say that there are all these funds that have set up but nobody knows them? How has the growth been and do they have the track record to give retail investors that confidence? Because we don’t want it to be based on one year, two years’ growth and that’s it.
Samuel: This is the biggest problem I have with the current fund distribution, like fund platforms and stuff. They give you one year performance, three years’ performance, because that’s all that matters. I just don’t like people focusing on the short term performance and that’s why we try not to highlight, even though it’s easier to sell that way.
Reggie: Yeah, for sure.
Samuel: One year performance, great! You should buy it, people jump on it. Then they lose out if it doesn’t, if it’s not sustained, the returns are not sustained.
Reggie: Pun intended!
Samuel: Pun intended. We don’t want to focus on those things. We are looking at our own measure of due diligence on these fund managers to make sure that they’re doing it in the right way.
This ESG space has been around since the 90s. But a lot of it was this kind of negative screening, simple stuff, which didn’t really work. Actually, long-term ESG passive index strategies have underperformed the market.
Reggie: Not the ones we want.
Samuel: Not the ones we want to touch. If we get those, they started early, but they’re not very good. Then in the 2000s and more recently, you’ve seen these kinds of companies like Mirova and Robeco all these companies appear and they’re not like humongous companies, but they do it really well. Those guys could have track records up to, 5, 7, 10+ years, but they were at a smaller size. So it’s important to understand how they perform when they’re small, how they perform when they’re bigger, is it sustainable, can you scale up? That’s important to look at but there are guys who’ve been around with good track record.
Then there’s a bunch who started in the past one year, two years, three years and every fund manager that we meet are saying, “We’re going to integrate ESG.” Which means that we’re going to talk about ESG in our normal investing process. And it doesn’t really make that much of a difference.
Then there are guys who actually… proprietary ESG, systematic investment processes, really taking it to the next level. Those are the guys that are most interested in because those are the guys who I think will differentiate themselves. Because those guys will pick the right companies and those companies as I said, I believe will be the successes of the future. It’s really important as active managers to really have a very high standard of picking those stocks.
Reggie: That’s great. Have you looked into a little bit of the green bond kind of thing recently? Exactly like what you said, it’s very difficult to do your own work because it’s a whole different thing. You need a whole team to look at these stuff. But you start to see some companies or some governments doing these kinds of one-off offering of green bonds. What are your thoughts on that?
Samuel: I think they are wonderful initiatives.
Reggie: Initiatives. Stirring the market but not really there… is that what I’m getting?
Samuel: I think it’s making an impact. It’s growing. Green bonds as an asset class is growing, I think it is really good.
Reggie: So what is Green bonds actually?
Samuel: Bonds that are issued with a very specific purpose, environmental, a climate purpose, reducing carbon footprint, or reversing the climate warming issued by governments or corporates with very specific purposes. For example, let’s say you are building a solar farm in China. The company wants to finance that, solar farm wants to issue a bond, then that would be classified as a green bond. So it’s actually a bond, but it’s for a very green purpose. Pretty simple. That’s what green bonds are. Government who have public infrastructure initiatives, or other kinds of investment initiatives where they want to finance it with bonds can claim to be a green bond.
Now there’s associations in Europe that classify as green bonds. You need certification to be a green bond issuer or classify that bond as a green bond. We need to go through that process. Now, it’s a growing space… it’s just like any other bond though.
Reggie: Is that like an ESG premium on that?
Samuel: It depends.
Reggie: Do you see a trend where similar kind of infrastructure development, but one with like green and there’s a premium on that? Is there something like that? You know what I mean?
Samuel: It’s difficult to answer because it’s actually demand and supply. Just like any other pricing, it’s demand and supply. If it’s a hot project, that’s going to have good IRR (Internal Rate of Return), good returns and it’s by a very trustworthy high quality company that everyone knows, they’re going to flock to it. They’re going to put the price up, bid up the price, which means that the interest rate goes down, yield comes down, which is not good for investors because it’s less yield. But if it’s like a little bit of a risky project from a slightly risky company, then they’re going to have to pay up 13%, 10% for that project. It’s a good deal if it stays solvent and the project makes money.
It depends how you look at it. Is it a good deal from a yield perspective? Is it a good deal from a credit perspective? It’s so much easier to value equity companies, stocks, because you’re just buying the company and you can make a bet on the overall company. For bonds, it actually depends on the issuer, it depends on the project, depends on the timing, interest rate, where interest rates are, so many different… and liquidity suddenly dries up in March 2020. It was a great project but no one wants to buy the bond because they don’t have any money. Then the yields are going to spike up. A lot of things, a lot of moving parts when it comes to fixed income. No simple answer…
Clearly no simple premium, recognition, nothing there…
Equities is much easier. Because if it’s a good company, it is a good company and she’ll keep it up.
Reggie: If we were to subscribe to this whole ESG investing methodology and this idea, is there a platform that we can go and see the impact? Is there like… are there bodies or websites or some place that we can go and see like, “Oh, okay. This thing has impacted so-and-so, so-and-so”?
Samuel: It’s two things, one is measurement and second thing is disclosure, both are really difficult. First of all, measuring your direct impact is very difficult. On Endowus website, when we launched the ESG portfolio, Sheng Shi who was here earlier, our Personal Finance Lead, he designed the ESG calculator with our investment team. Every time you invest $1,000 in the ESG portfolio, this is how much carbon emission… it’s like two trips from Tanjong Pagar to Joo Chiat. So you can go on the edowus.com website and see that ESG calculator and play around with it.
A lot of people do that kind of stuff. People can understand what your actual impact is. It’s difficult to measure. The easiest one is environmental. The social and governance is very difficult to measure. But also, it’s on the company to disclose a lot of information. There’s no consistency in the disclosure and that’s why regulation is important. So governments and regulators have to step in and say, “Hey, companies need to report on these metrics that are important in our view.”
Europe is at the forefront of this, they just announced a recent initiative and regulations are changing there where you need to improve disclosure, have more standardized disclosures. So that’s great, and the US and Asia hopefully will follow. As disclosure improves, the measurement will also improve. We’re in early days, but I think it’s improving overall and hopefully we can repackage it, like we did with our ESG calculator so people can understand it better.
Reggie: Nice, cool stuff! If someone wants to do that, is there like a place where they can go and check it out more? More information and where should we go to?
Samuel: If you type sustainable investing, amazing, massive literature places… our fund managers in Endowus, we have what’s called Endowus Insights. When we began the company for over a year, we didn’t have any commercial business. We just wrote on investing, it was like a blog. People thought we were bloggers… oh we lost the service… and you know what, SGX nominated us for Orb Awards Financial Journalism, financial literacy.
We had no idea! They suddenly said you’re nominated! What? Us? We’re not even journalists, we’re not even bloggers, we’re launching a service. That’s what we got known for in Endowus Insights. Back then it was called The Know. I think financial literacy, improving financial literacy, helping with financial education, what you do Reggie is amazing, fantastic, love it. I think it really makes a difference in people’s lives. It’s a responsibility for people in media, but it’s a responsibility for us as service providers to help educate our client base, to be more knowledgeable so that they can make informed decisions about where they place their money. And hopefully that will lead to better outcomes.
There’s also a place to be played by regulators, the MAS (Monetary Authority of Singapore) and the industry associations to also contribute. They do a lot admittedly to improve that space as well. It’s a collaborative exercise and we’ll do our part. But if you type sustainability, there’s like tons of resources. So it depends on what your interest is. Are you more academic? Then you can look at academic papers on sustainable research investing. If you want really simple stuff, just look at investor PDL or financial blogs who talk about sustainable investing and just read the light stuff. In between we have Endowus, we have the financial fund management companies. I wouldn’t go to brokers or banks, they’re really normally hype bad. Sorry, I keep bashing banks today, not intentional, banks do this…
Reggie: The reason why you left.
Samuel: That’s the reason why I left! But they need to do better. The fund management companies, because they’re the guys who actually do the investing, they’re the professional managers, they’re the professional investors, they’re the practitioners.
Reggie: We have all the reports of that…
Samuel: If you want to learn about how doctors operate, you don’t go to an academic or read some…
Reggie: Hang out with the doctor.
Samuel: You ask the doctor how it’s done. So if you want to learn about investing, ask the investors. Fund managers have a lot of resources and I would recommend Mirova, Robeco, Schroders, Aberdeen Standard Life, names that we are familiar with, even BlackRock or other big companies. They have a lot of resources on sustainable investing and they’re putting it up at the start of their web pages and landing pages these days because it’s the hard thing. You won’t have any trouble finding these resources, it’ll be easy to find.
Reggie: Awesome, cool stuff. Thanks for coming on, we had a great time. Appreciate it.
Samuel: Thank you Reggie.
Reggie: Hey! I hope you learnt something useful today and truly appreciate that you took time off to better your life with The Financial Coconut. Knowledge is that much more powerful and interesting when shared, debated and discussed. Join our community Telegram group, follow us on our socials, sign up for our weekly newsletter. Everything is in the description below. If you love us and want to help us grow, definitely share the podcast with your friends and on your socials. Also sign up for our members’ backend for more investment related content, live discussions, curated content and most importantly, your commitment to us is a step forward for us to continue creating great content focused on you rather than advertisers.
For more information, check out https://thefinancialcoconut.com. With that, have a great day ahead. Stay tuned next week and always remember; personal finance can be chill, clear, sustainable for all.
There’s three questions for you that we ask everybody and the first question is… what is a core life principle that you hold close to?
Samuel: Oh man, that’s tough!
Reggie: Have three kids.
Samuel: Everybody’s different again. So more broadly life principles, I am all about helping others. I think it gives me the most satisfaction. I think it really brings meaning and purpose to my life, I think they win, I win. If I do that, then sometimes being selfish, helping others, sometimes other people can help me too. So help or love, you can place different words into it, but helping others, loving others is what I’m all about.
Reggie: Cool stuff. Next question… what is a personal finance advice that you feel needs to be further propagated?
Samuel: Endowus, you need to use the Endowus platform now! Just kidding. We’re a young brand and people don’t know us as well, but they should know and use it because it’s easier, it’s better, it’s cheaper… I know you’re going to cut this out, so I’m just joking with you.
Look, if you have the time and you want to learn about investing, do it. Invest, don’t just think about it. Invest in a stock, even a simple company like Apple or Tesla, Amazon or closer to home Singtel. Invest and see how it goes because unless you put your money where your mouth is, you’re not going to spend the time to learn and be better at investing. So that’s the first thing, just go and try it, but everybody’s different. Unless you’re a professional investor, don’t try to do everything yourself, use the professionals to your advantage, so that’s the second thing.
Third one is cost, look at cost. Like you look at when you buy green tea, which I have a bottle of green tea, you look at the prices, you don’t just buy any green tea. When you’re buying a car, you compare prices and you shop around because the same car could be sold at different places. Maybe parallel imports are cheaper. When it comes to investing, same thing, look at the cost. The same fund is sold through DBS, through Fundsupermart and through Endowus and through a broker. They’re all different, you got to look at the cost because 1% difference in cost compounded over 30 years is a 250% difference in return. Just save 1% and do that over 30 years and your life will change. So cost, you got to look at cost.
Reggie: Nice, good stuff, love that. Last question. Which part of your life are you giving additional focus on now?
Samuel: Relationships is what I’m all about, because at work, at home, it’s all about relationships. I want to invest my time, my money, my energy in relationships. I left the company Morgan Stanley after a long career, I had no more income, I prayed to God that look, at least give me enough money so that I can buy people lunch. I don’t want to skimp on lunch or not being able to pay for lunches for other people because that’s important to me. I want to build relationships, I want to maintain relationships, I want to help people and so relationships are what I’m all about and it doesn’t matter where. Work, home, all of my relationships are important and this relationship, Reggie, is important.
Reggie: Cool stuff.
Samuel: Thanks man.
Reggie: Fist bump. Thank you.
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Buy Now, Pay Later: How Does It Work? [Chills 34 With Hoolah]
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