Remove the weeds

Just as weeds reduce the harvest, investment myths can mislead investors from achieving desired investment outcomes. We bust these myths and uncover the facts on some common misconceptions.

Myths about Responsible Investing can deter us from taking into account Environmental, Social and Governance (ESG) considerations in our investment decisions and make a positive impact on society.

Myth 1

Doing good comes at a cost


Focusing on ESG factors can help reduce exposure to long-term risks

Research suggests that returns from sustainable investing are comparable to the market over the long-term 1. Companies that have sound policies that consider their impact on the environment and society tend to have more sustainable business practices and less exposure to damaging incidents. This makes their earnings less volatile.

1 MSCI, “Foundations of ESG Investing”, 4ca130909226

You can enjoy comparable returns but with lower volatility over the long-term through Responsible Investing.

Myth 2

Responsible Investing is a fad


It’s more mainstream than you think

As investors acknowledge that environment and climate related risks are long-term global challenges, Responsible Investing has become more mainstream. As of 31 March 2020, the Principles of Responsible Investing, the world’s leading proponent of responsible investment, had 3,038 signatories, representing USD 103.4 trn of assets.

You can make a positive impact through your investments by selecting managers who actively integrate ESG considerations.

Myth 3

Responsible Investing means you don’t invest in companies with poor ESG track records


There are many approaches to Responsible Investing

Different asset managers have different approaches to Responsible Investing. Some choose to exclude certain companies based on their business activities. Others choose to integrate material ESG factors into their investment decisions and to engage with investee companies. The latter approach hopes to influence changes in business strategy and activities, which may add value to their investments over time.

There are multiple ways to integrate ESG considerations into an investment process. Pick funds with investment objectives that align with your core beliefs.

Myth 4

Responsible Investing may give me too much, or little, exposure to certain sectors


Managers may or may not limit sector exposures

Some investors worry that Responsible Investing may result in unintended consequences. This may include too much exposure to the technology sector (which has zero carbon emissions) or too little exposure to the financial sector (which historically has had many controversies).

In reality, managers may or may not limit sector exposures to manage shorter term deviations from market performance.

Review fund disclosures to understand the potential deviations or tilts which your investment may be exposed to.

Myth 5

Responsible Investing is less effective in the Emerging Markets due to lower ESG ratings


Changes in a company’s behaviour towards ESG considerations matter more

Developed markets, especially Europe, may lead in terms of the quality of information companies disclose on ESG metrics as well as in terms of having higher ESG ratings.

However, it is not the ESG rating that matters to the markets. It is the change in a company’s behaviour that becomes recognised by the market that matters. Investors cannot rely simply on ESG ratings – very often, the ESG ratings of different providers may not agree with each other!

Don’t shy away from Responsible Investing in Asia and the Emerging Markets. Many policymakers in these countries are implementing frameworks to improve ESG reporting in their markets which can in turn influence company behaviour for the better.

Misconceptions of bonds can prevent investors from fully enjoying their diversification benefits.

Myth 1

Bonds offer lower risk and therefore lower returns


Bonds can offer more attractive returns than stocks

Historically global bonds have provided better risk adjusted returns than equities. Over the last 10 years, the sharpe ratio (which measures risk adjusted returns) of global bonds was higher than that of global and Asian equities1.

Myth 2

Bonds go up when stocks go down


Bonds can benefit from the same factors that drive stocks

Bonds tend to perform well in low growth environments where interest rates are low or heading lower. These are usually weak periods for stocks.

However, high yield and corporate bonds can also perform well when the economy is booming, and stocks are rallying. This is because stronger profits can lower the risks of such bonds not making their interest or principal payments.

Myth 3

You don’t need an active strategy for investing in bonds


Not all bonds are created equal

Passive investing by following bond benchmarks may not always be ideal as they tend to be dominated by countries or companies that have issued the most amount of bonds - not always the best reason to own a bond!

Bonds also come with different credit, default and ESG risks, as well as different maturities and currency exposures. As such, investors can benefit from an active selection of bonds by a financial professional.

The general concepts shared are for educational purposes only and not for the use in the marketing or sale of any Eastspring investment products.

Viewers are advised to be cautious if they intend to invest in any products that are used in the illustrations as the illustrations do not cover the full spectrum of considerations required in making an investment decision.

This information is not an offer or solicitation by anyone in any jurisdiction in which such offer or solicitation is not lawful or in which the person making such an offer or solicitation is not qualified to do so or to anyone to whom it is unlawful to make such an offer or solicitation. It should not be construed as an offer, solicitation of an offer, or a recommendation to transact in any investments if mentioned herein.

The information contained herein does not have any regard to the specific investment objectives, financial situation or particular needs of any person. Investors may wish to seek advice from a financial adviser before any making investment decision. In the event that an investor chooses not to seek advice from a financial adviser, he should consider carefully whether the investment in question is suitable for him.

Eastspring Singapore is a wholly-owned subsidiary of Prudential plc of the United Kingdom. Eastspring Singapore and Prudential plc are not affiliated in any manner with Prudential Financial, Inc., a company whose principal place of business is in the United States of America or with the Prudential Assurance Company, a subsidiary of M&G plc (a company incorporated in the United Kingdom).