PERSPECTIVE3-5 min to read

How can investors incorporate sustainability into multi-asset investing?

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Jason Yu
Head of Multi-Asset Management, Asia

Extreme weather events have become more frequent because of climate change. For instance, Hong Kong experienced record-high rainfalls in September, with precipitation reaching almost 25% of the annual average in just one day. Amidst widespread torrential rain, many areas in Hong Kong were heavily flooded and transportation was disrupted.

Such events highlight the imminent threat of extreme weather. Beyond the impact on our daily lives, we can no longer underestimate the effect of climate change on investment portfolios. Indeed, sustainable investing has become an indispensable concept in the investment world.

Profitability improves with sustainability

Since 2020, Schroders has incorporated environmental, social, and governance (ESG) factors into our overall investment research process and strategic considerations. Sustainable investing not only fulfils the ethical values of investors, but also brings tangible benefits to investment portfolios through the specific governance goals of companies. Based on our observations, companies that prioritise sustainability are less likely to reduce dividends, resulting in more stable payout records that ultimately give back to investors.

The reasoning behind this is understandable – when companies place greater emphasis on sustainability, that indicates more robust medium to long-term strategic planning on their part, which can potentially lower the cost of capital, and can reflect in stronger ability to deliver steady profits and financial performance.

Increased focus on carbon neutrality benefits climate change-themed investments

Climate change is one of our favoured sustainable investing themes, and it encompasses sub-themes including solar power, wind power, and electric vehicles. Renewable and clean energy is another area that we have our eyes on. These are sectors that we believe are likely to benefit from medium to long-term carbon peaking and neutrality goals.

Year to date, large-cap renewable energy stocks have outperformed smaller ones, reflecting the influence of the overall macroeconomic environment on climate change-related investments within an economic cycle. Investors will need to understand and assess the macroeconomic environment, as well as sustainability factors to better achieve robust returns and profits.

To strike a balance between growth and income, investors may consider a multi-asset allocation approach and in doing so, invest in sustainable corporate bonds or green bonds alongside equities. With rising interest rates, green bonds currently offer decent returns for investors. Taking the latest issuance of green bonds in Hong Kong as an example, the fixed coupon rate has increased to 4.75%.

Certain companies may not necessarily be directly related to sustainability, but they do possess strong ESG credentials and clear carbon-neutrality targets and plans. As such, they should still be considered as sustainable investments.

Transition to green economy offers investment opportunities

Despite the fact that returns on sustainable investments will continue to be influenced by short-term factors such as inflation and rising interest rates, the shift towards sustainability and ESG is an irreversible trend. Compared to two to three years ago, sustainability has now gained broader acceptance among investors and companies. An increasing number of companies are setting targets for achieving net-zero carbon emissions.

For example, some traditional energy companies have initiated the transition towards renewable energy and have plans to eventually phase out fossil fuels. We believe that the transition of energy firms and other sectors will bring a wider range of investment opportunities to the market, while also making a lasting positive impact on society and the environment.

Investors should pay attention to whether companies claiming to embrace low-carbon strategies have specific targets and plans in place, whether they are actively implementing transformation to a more sustainable business model, the progress they have made so far, and the credibility of their transition action plans. 

As a responsible active asset manager, we believe it is crucial to engage more actively with businesses and issuers, and exercising what our industry calls “active ownership”. This involvement enables us to be participate more widely in the activities of investees. In this way, we can encourage and promote more responsible corporate behaviour and sustainable business practices, all under a framework of good corporate governance. To set an example, Schroders voted at over 7,000 shareholder meetings and engaged with 3,400 companies in 2022.

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This material has not been reviewed by the SFC. Issued by Schroder Investment Management (Hong Kong) Limited.


Jason Yu
Head of Multi-Asset Management, Asia


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