Samuel Rhee is the Chairman and Chief Investment Officer, Endowus. Rhee was a mentor at Startup Weekend Singapore 2021: Seeds of Tomorrow. Held on April 23rd to 25th, the event was joined by innovators from over 21 cities from around the globe to drive awareness and innovation in sustainability. Seeds of Tomorrow resulted in around 30 ideas, with a common goal of tackling challenges arising from the climate crisis.
Rhee is a 27 year veteran of the finance industry and a FinTech investor, advisor, and entrepreneur focused on company building with senior executive management experience at global financial institutions and extensive Asian network. He was formerly the CEO and Chief Investment Officer at Morgan Stanley Investment Management in Asia and was at Morgan Stanley group for 17 years of his career.
In this TechNode Global Q&A, we learn how businesses are increasingly getting into Environmental, Social, and Governance (ESG) investments, as well as the challenges that businesses face in their sustainability strategies.
What are the trends driving the need for more sustainable business practices?
Sustainability has become something important for almost all companies across various industries. More consumers are choosing to support businesses with sustainable missions that lead with ethical and environmental values. According to a study of ASEAN consumer sentiment released last year by UOB, 43 percent of Singapore consumers are making a deliberate decision to spend at businesses that use sustainable business practices and across ASEAN, 54 percent of consumers want to buy from brands that use sustainable business practices. Looking ahead, we believe organizations will be increasingly judged on performance against external rather than internal goals.
There has also been an increase in demand for Environmental, Social, and Governance (ESG) investments. Some 79 percent of investors in Asia-Pacific increased ESG investments “significantly” or “moderately” in response to Covid-19, according to a recent MSCI 2021 Global Institutional Investor survey. The demand has led businesses to relook at their business models and move towards sustainable practices. This also adds pressure to businesses and leads them to claim that their products and services are “clean”, “organic”, “sustainable”.
What are three key challenges that innovators need to overcome in addressing regional and global sustainability concerns?
Broadly speaking, there are two clear issues: consumer trust and verifiable reporting to cement this trust.
1. Greenwashing
Alongside the growing appetite for ESG investing comes concerns of “greenwashing” — a term used to describe how a company gives a false impression or provides misleading information on how products are more environmentally sound than they really are.
In our recent Endowus study surveying some 1,100 individuals, we found that a majority (59 percent) of respondents cite the possibility of greenwashing as a key concern in adopting ESG investment products. It is essential for us to leverage on data and technology, and build a rigorous framework for managers and product due diligence. Endowus implements a rigorous quantitative and qualitative assessment that is conducted across the whole ESG universe and screens out poor performers or those that do not do what they say or do not have a robust process. We ensure that the funds have the potential to deliver good risk-adjusted performance, and have in place a robust and repeatable investment process that is managed by a qualified and experienced management team.
2. The absence of a standardized global framework to measure and report sustainable practices
There are various ESG scores, ratings, and frameworks to evaluate investment products, but these methodologies are not consistent. Companies can claim to be doing good but rather than taking meaningful action against climate change or social causes, there have been reports of false claims.
Different reporting metrics and disclosure standards from ESG-setters, such as the Sustainability Accounting Standards Board (SASB) and the Global Reporting Initiative (GRI), have perhaps created unintended confusion in the marketplace.
What complicates the picture is that there is no single approach to doing ESG investing — each fund manager has their own philosophy and methodology. Therefore, at Endowus, we conduct an additional layer of due diligence to the ESG funds to ensure the integrity and quality of the ESG incorporations by the fund managers. It is the fund manager’s responsibility to identify and avoid “greenwashing” on a corporate level, and it is our responsibility to discern how well fund managers are doing their job.
3. Lack of knowledge when it comes to ESG investing
The growing demand for ESG investments is real, but as yet remains unmet: In a recent Endowus survey of over 1,100 participants in Singapore, results indicated that while ESG investing resonates with over 93 percent of respondents, only 28 percent currently hold any ESG investments. Understanding and trust are key issues: 58 percent of respondents acknowledge a lack in their own understanding or knowledge of ESG investing, while 43 percent pointed to a lack of good available options as a key hindrance.
Are there any sustainability challenges unique to Southeast Asia? Can these be addressed through global solutions, or will we need localized efforts?
Refer to point 2 on the lack of a standardized framework to measure sustainability.
On a micro level, fund managers and advisors must assess ESG frameworks, and ensure that partners are part of the UN Principles for Responsible Investment network – essentially do right by their clients and screen for higher quality ESG companies. The underlying issue is still trust — can investors know for sure that every dollar is going towards a company or fund that is contributing to actual impact on the ground?
On a global level, global networks such as the UN-backed Principles for Responsible Investment, which launched a three-year strategy that aims to raise the bar for signatories as the UN steps up its drive to develop a sustainable global financial system, is gaining traction and getting more signatories on board to raise the bar for financial policy and regulation, globally. The question is then: How can companies be convinced to adopt and implement policies outlined in these regulations?
On localized efforts, last year the Monetary Authority of Singapore (MAS) launched the Green and Sustainability-Linked Loan Grant Scheme for companies to get more support in securing green and sustainability-linked loans. This move is an important part of the green finance ecosystem that Singapore is building – to support Asia’s pivot towards a sustainable future. In addition, supported by the MAS, Singapore’s first institute dedicated to green finance research and talent development was launched last year by the Imperial College Business School and Lee Kong Chian School of Business at Singapore Management University (SMU). The research institute is dedicated to green finance research and talent development and seeks to equip professionals with new skills and create a strong pipeline of green finance talent.
As such, sustainability efforts are likely to be more effective when either mandated as public policy or supported by government-led initiatives. However, emerging economies in Southeast Asia may face greater challenges as it will be seen as a hindrance to economic growth due to the assumed higher cost to sustainable business practices.
What part is Endowus doing to contribute toward sustainability?
Endowus was started with the vision of helping people invest more efficiently, enabling them to live easier today and better tomorrow. While historically the focus has been on better advice, greater access, and lower cost, we find ourselves uniquely positioned to respond to the growing demand for better sustainable investing options in Singapore.
In March this year, Endowus launched Asia’s first digital multi-asset Environmental, Social, and Governance (ESG) portfolios, to pave the way for retail investors to gain access to better and more credible sustainable investing options at a lower cost. ESG-themed offerings are traditionally costlier and only exclusively available to institutional and private banking clientele.
While there are several ESG investment options on the market, Endowus’ offering is built specifically to suit the Singaporean retail investor. The drive towards more sustainable efforts is viewed as doing good, with a general consensus that it comes at a sacrifice of returns. In our due diligence through a stringent selection of credible ESG funds, we have curated an ESG portfolio made up of multi-asset, multi-fund manager products that do not compromise on performance.
The Endowus Investment Office team has worked closely with leading FMCs to develop original ESG Portfolios that are:
- Multi-asset, covering both Equities and Fixed Income (most competing offerings are only one or the other), which enables a full range of asset allocation options for sustainable investing;
- SGD-denominated or hedged, removing unnecessary FX risk for the Singaporean investor (USD and EUR options are unfortunately still the most common today);
- Composed of unit trusts (instead of ETFs), allowing more opportunity to negotiate lower fees from the FMCs, which means investors can end up paying less (additionally, 100% of trailer fees are rebated to the client, further compressing fees). Partnering closely with fund managers also allows Endowus to conduct deeper due diligence through direct interaction with their investment teams.
Aside from creating a more inclusive platform for ESG investing, Endowus seeks to improve ESG practices specifically on the social front, focusing on diversity and inclusion in the workplace with 40 percent of our workforce being female, and over 10 nationalities represented in a team of 57. Environmental initiatives are ingrained in our everyday practices and built into the culture of the company.
How do you define impact, from the perspective of sustainability?
A key measure to the impact of sustainability initiatives is observed economic growth while promoting jobs and stronger economies — and a balance in ensuring that all other sustainability measures are kept in place to negate the effects of climate change, and other environmental factors.
Do you think that sustainability issues should necessarily be addressed by drastic or disruptive changes, or can we do incremental solutions that will contribute to an overall improvement?
Non-governmental organizations suggest that drastic action is required for actual change to take place, especially with regard to environmental factors. But it is hard to disagree with the fact that incremental change, especially if it comes with a tangible benefit of a growing investment portfolio, can contribute to real and long-term behavioral as well as policy changes that can last and can make sustainable improvement for the betterment of all.
Some technological advancements have had a negative impact on sustainability, e.g., power consumption by certain blockchain technologies. How can we balance out the negative effects of increased consumption with the benefits of innovation?
It’s widely known that bitcoin mining practices are detrimental to the environment, producing more carbon dioxide emissions than small, developing nations. What’s interesting though is that compared to large banking institutions, bitcoin farming still consumes far less energy although one may argue that banking institutions cater to a far larger population in most instances.
While dire environmental effects have been outlined, blockchain technologies have benefited sustainability practices in agriculture in source tracing for food safety and efficiency in supply lines and fair pricing for instance. And specifically, EnergiMine has developed a blockchain-based rewards system that uses digital tokens to incentivize consumers to save energy.
The challenge remains though, on whether these smaller, sustainable blockchain initiatives can scale up against the energy consumption of coin farming – notably as the number of coin types continues to increase.
Featured image credits: Unsplash