Financial Blog

The popularity of ESG themed-strategy has become increasingly politicized causing a lot of investors to turn sour on the sector in 2023. In addition to the challenging macro environment and middling returns of the sector, investors voiced concerns on green-washing, political scrutiny of sustainable and ESG investing including Republican state-led boycotts and boardroom debates from companies and stakeholders that follow ESG principles. Against this backdrop, some companies and thematic investors have completely walked away from their investing efforts in the sector.

A recent report from data firm Morningstar showed that roughly $13 billion was withdrawn last year from funds that invest in companies with environmental, social and governance principles. Outflows noticeably accelerated during the fourth quarter. The bulk of the outflows came in a single fund, the iShares ESG Aware MSCI USA ETF, which saw more than $9 billion in withdrawals during the year.

Source: Morningstar. (Link: https://www.morningstar.com/sustainable-investing/globally-esg-funds-suffer-first-ever-quarterly-outflows-fourth-quarter-2023)

However, behind these headlines, we think that global decarbonization efforts remain a priority, while growth trends and fundamentals also remain strong for most of these large-cap companies. The road to net-zero emissions by 2050 remains a big feat, and we think that use of technology or innovation from public companies will play a key role in finding long-term viable solutions.

– SBC Equity Fund Managers

On a global scale, there are already existing conferences and events such as the United Nations Climate Change Conference (COP), where various stakeholders discuss on these matters and agree on how to incorporate ESG into their respective company frameworks.

ESG Landscape Updates for Year 2024

This year is shaping up to be a formative one for ESG. Both predictable and unpredictable events will likely take shape this year, some of which will surely alter the ESG landscape permanently. The biggest changes this year are to come from the regulatory side. The changing regulatory landscape has brought focus toward the introduction of higher-quality ESG disclosure requirements and increased the need for investors to do further due diligence, improve reporting requirements, and crack down on the greenwashing of funds. As more mandatory

ESG requirements come into effect, associated potential liabilities are also likely to correspondingly increase, with companies facing additional pressure to more effectively integrate ESG into their practices and financial statements.

SBC Equity Fund Managers’ View

We are of the view that it will be an ambitious growth year for the ESG sector with potential headlines surrounding the sector when it comes to dealing with expanding use of clean power, making progress on climate, protecting and developing human capital, incorporating use of technology, increasing global disclosure regulation and widening the impact of sustainable investing.

As we enter 2024, we think the turnaround in the macro headwinds faced last year now serves as a tailwind for the sector this year. Last year’s elevated inflation and rising interest rates have impacted the ability of companies to mobilize capital towards big-scale ESG-related projects and targets. De-rating of stocks have caused sell-off of clean energy stocks, while only a very few AI-related stocks drove most of the market’s returns. This year, waning interest rate pressure, policy tailwinds and improving economics present a favorable environment for stocks, whose long-term prospects remain attractive.

It may be costly and risky to target a single security within your portfolio, hence investing in an Exchange Traded Fund (ETF) or fund that feeds into an ETF, can help simplify your approach to sustainable investing. In Security Bank, we offer the SB ESG Aware Equity Index Feeder Fund which seeks to track the performance of the iShares ESG Aware MSCI USA ETF. The Target Fund focuses on large- and mid-cap-sized U.S. stocks that have favorable environmental, social, and governance (ESG) ratings, allowing you exposure to companies exhibiting positive ESG characteristics.

As of the end of January, the Feeder Fund has returned 1.03% year-to-date and has registered a strong return of 18% since the launch of the fund.

DISCLAIMER:

The Unit Investment Trust Fund (UITF) is a trust product and not a deposit account and is not insured or governed by the Philippine Deposit Insurance Corporation (PDIC). The UITF is not an obligation of, guaranteed, nor insured by the trust entity or its affiliates or subsidiaries. Due to the nature of the Investments of a UITF, the returns/yields cannot be guaranteed. Historical performance, When presented, is purely for reference purposes and is not a guarantee of similar future performance. Any losses and income arising from market fluctuations and price volatility of the securities Held by the UITF, Even if invested in government securities are for the account of the client. As such, the units of participation of the client in the UITF, When redeemed, may be worth more or less than his/her initial investment/contribution. The Trustee is not liable for losses unless upon willful default, bad faith or gross negligence. the investor must read the complete details of the fund in the UITF’s plan, Make his/her own risk assessment, and when necessary, seek an independent/professional opinion before making an investment.

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