Amid escalating global challenges like climate change and social inequality, sustainable investing has emerged as a compelling, ethical option for investors seeking to align their portfolios with their values. Keeping these factors in mind, more individuals seek sustainable investments, incorporating environmental, social, and governance (ESG) factors into an investment thesis. Similarly, corporations are focusing on ESG, whether as a strategy to appeal to the investing masses or to contribute to the world’s greater good. Regardless of a company’s intentions, the shift towards sustainable investing and action also presents an opportunity for investors to do good for the planet while growing their wealth, creating a win-win situation.
The Rise in ESG
Sustainable Consumption
A recent survey conducted by PwC last year sheds light on a notable shift in consumer behaviour toward sustainability, revealing that more than 20,000 consumers across various countries and territories are willing to pay an average of 9.7% more for sustainably produced or sourced goods. This willingness persists despite the rising cost of living in an inflationary environment. Notably, 85% of these consumers reported experiencing the disruptive effects of climate change firsthand, which has motivated them to take responsibility for their consumption habits.
Further emphasising the trend, a Rakuten Insight survey involving over 109,000 consumers across the Asia-Pacific region highlighted that Gen Z is at the forefront of valuing sustainable habits, with 88% prioritising it, compared to 79% of Baby Boomers. This significant demographic shift suggests a future market trend heavily influenced by Gen Z’s growing purchasing power.
Additionally, there is increasing awareness of social sustainability and the importance of ethical corporate governance. Social sustainability refers to business operations that consider all stakeholders, not just direct transaction participants, including communities and non-governmental organisations (NGOs). It focuses on achieving social equity and promoting fairness. Meanwhile, ethical corporate governance is gaining attention, with a push for more diverse and inclusive leadership, fair compensation practices, and robust risk management.
ESG and the Financial Markets
The financial markets are responding to these changes as the interest in environmentally-friendly investments grows. According to a report by Kroll, from 2012 to 2021, industries leading in ESG practices outperformed their peers, with an annualised return of 12.9% compared to the 8.6% return of lagging companies. This data underscores that investing in sustainable practices not only boosts a company’s public image but can also lead to improved bottom lines through enhanced operational efficiency, better risk management, and the ability to attract and retain top talent, which in turn drives innovation and competitiveness. These insights suggest that sustainability is no longer just a moral choice but a strategic one, increasingly integrated into core business and investment strategies due to its potential to drive financial performance and address global challenges.
Sustainable investment options are abundant in today’s market, making it easier for everyday investors to align their portfolios with their values. Investors can access a company’s ESG score across various financial instruments like equities, fixed incomes, or exchange-traded funds (ETFs). Notable independent providers of these scores include MSCI for equities, Moody’s for fixed incomes, and Morningstar for ETFs. This information availability helps investors make informed decisions about whether their investments contribute to beneficial causes. Additionally, thematic ESG funds are gaining popularity, with major asset managers like Vanguard and BlackRock issuing funds that focus on sustainable investment themes. These funds are designed to appeal to investors who wish to have a direct impact through their investment choices.
However, a significant challenge within the ESG landscape is greenwashing. This involves companies presenting their products or business practices as more environmentally friendly or sustainable than they truly are, through misleading marketing or advertising. Governments and regulatory bodies are stepping up with stricter regulations and transparency requirements to counteract greenwashing. For instance:
- The Singapore government has mandated climate reporting for all listed companies on the Singapore Exchange starting in 2025, with more stringent requirements following in 2026.
- The United States has approved the first national climate disclosure rule, which requires publicly listed companies to report their climate-related risks and, in some cases, greenhouse gas emissions, starting in 2025. South Korea and India are also advancing their regulatory frameworks.
- South Korea will require mandatory climate disclosures starting in 2026, and the Securities and Exchange Board of India is expanding the nation’s ESG reporting framework to include more companies based on market capitalisation through 2027.
These regulatory advancements are critical for enhancing the reliability of ESG disclosures and ensuring that investments truly contribute to sustainable development. This trend reflects a growing global consensus on the importance of transparency and accountability in promoting sustainable investment practices.
Nudging Firms Towards Environmental Sustainability
Carbon Taxes
As consumer and governmental demands for environmental responsibility increase, it’s essential to have policies that effectively guide firms toward sustainable practices. While transparency and public exposure of a company’s climate actions can influence corporate behaviour, direct financial consequences are often more compelling in driving significant changes.
Carbon taxes are proving to be a robust solution, effectively discouraging high-pollution activities by imposing a cost on emissions, while also encouraging investments in cleaner, more efficient technologies. This approach helps curb pollution and stimulates innovation in sustainable practices.
Globally, carbon taxes have found footholds in various regions, particularly in Europe, and are increasingly adopted in parts of Asia such as Singapore, Korea, and Japan, as well as in Latin American countries like Chile, Colombia, and Argentina. The pricing of these taxes varies significantly. Uruguay stands out with the world’s highest carbon tax at US$167 per metric ton of CO2 equivalent, whereas Singapore has set its carbon tax at S$25 per ton for 2024 and 2025, with planned increases in subsequent years.
The revenues from these taxes are often channelled back into supporting decarbonisation initiatives, aiding the economic transition to greener practices, and softening the financial impact on businesses and households brought by environmentally unfriendly business practices. This strategic use of carbon tax revenues not only helps mitigate the direct costs associated with transitioning to a sustainable economy but also supports the fiscal budget of the government.
Carbon Credits
In addition to carbon taxes, governments worldwide have implemented a variety of carbon regulation instruments, either as standalone measures or in combination with carbon taxes, to manage market behaviours and their environmental impacts. Carbon credits have notably become increasingly significant. Over the past decade, the scope and influence of these policies have expanded dramatically. A decade ago, such policies covered only about 7% of global emissions. As of 2023, they now encompass nearly a quarter of all emissions, generating a record US$104 billion in revenue, with 75 carbon pricing instruments operational across both emerging and developed economies.
Carbon credits, or Emission Trading Systems (ETSs), are mechanisms set up by governments to incentivise firms to reduce their emissions. The United Nations allows countries a certain number of credits, and each government sets a cap on the maximum allowed emissions level, issuing permits or allowances for each unit of emissions that firms release during their operations. Firms that exceed their emission caps must either purchase additional permits or find ways to cut their emissions.
Conversely, some firms may find it cost-effective to reduce emissions and sell their excess permits. This creates a trading system designed to achieve emissions reductions at the lowest cost to the economy. Firms that can reduce emissions inexpensively are motivated to do so and potentially profit, while those facing high reduction costs must bear the expense of buying permits. However, carbon credits are only traded in a regulated carbon credit market, where only governments and firms can participate.
On the other spectrum, carbon offsets in the voluntary market are more open to the market, where carbon initiatives including reforestation, conservation, and renewable projects can be freely traded. In most cases, carbon offsets are used by companies for public relations motivations as a way to improve their ESG ratings, raising questions about the integrity of the system. Given the regulated nature of the system, it is difficult for retail investors to invest directly in the carbon market. However, there are ETFs available such as KraneShares Global Carbon Strategy ETF. Likewise, investing in companies that seek to reduce carbon emissions in general, such as a carbon capturing company or renewables will benefit from the carbon market, allowing them to sell carbon credits or carbon offsets to other firms. Additionally, individual investors may choose to speculate on the price of carbon credits using futures.
As the world grapples with pressing environmental and social challenges, the shift toward sustainable investing is more than just a trend—it is an evolution in how capital is allocated for long-term impact. With increasing consumer demand for sustainability, growing regulatory support, and proven financial benefits, ESG-driven investments present an opportunity to generate both meaningful change and economic returns.
While challenges like greenwashing and regulatory complexities remain, continued advancements in transparency and accountability will further solidify sustainable investing as a core pillar of modern finance. For investors, aligning financial goals with global sustainability efforts not only fosters a better future but also positions them to thrive in an increasingly ESG-focused world.