As patient investors, family enterprises take a long-term approach in their investment strategies. Sustainability and Environmental, Social and Governance (ESG) factors are increasingly becoming a focal point among investors who seek to grow and preserve wealth.
As family enterprises explore new investment opportunities, can ESG investing be a consideration? What do family enterprises need to focus on as they review their investment decisions to incorporate ESG investing?
Praveen Tekchandani, Singapore Climate Change and Sustainability Services Leader, Ernst & Young LLP and Jean Chia, Global Chief Investment Officer, Bank of Singapore share their insights.
Prioritising sustainability in investment strategies is increasingly crucial for enhancing portfolio resilience and driving long-term value.
What should family enterprises bear in mind as they build ESG factors into their investment strategies?
Jean Chia: "Strategic ESG investing can help family enterprises achieve sustainable growth and leave a positive legacy for future generations. But this does not mean that every ESG investment is right for a family enterprise portfolio.
For many organisations, including family enterprises, the focus on ESG has been largely driven by sustainability concerns and the energy transition.
Notably, sustainable investing will remain a structural theme for the long-term due to the significant funding gap for the climate transition. The United Nations Conference on Trade and Development estimates that about US$4t need to be mobilised each year to fight climate change. Hence, investors are defining their investment objectives beyond traditional risk-reward metrics in favor of measurable decarbonisation and climate risk outcomes.
However, an important consideration is that energy transition pathways are asynchronous, depending on political will, the availability of public and private funding, and the speed at which global policies align. In fact, over the next five years, it is believed that climate pragmatism — or taking a practical and flexible approach to deal with climate change — will prevail.
For example, Indonesia offers an opportunity as one of the world’s largest carbon sinks, with its vast natural environment to absorb carbon dioxide from the atmosphere. The country also boasts a rich reservoir of rare earth elements and minerals required in technological advancements, which can be a significant ESG investment opportunity. However, Indonesia can take the path of energy pragmatism, relying on coal-fired power temporarily to generate the required capital for investments to drive significant decarbonisation outcomes. Concurrently, time is needed for the gestation of policy changes in support of energy transition goals.
That said, investing in green enablers will remain a key theme. Established profitable companies with exposure to clean energy and electric vehicles that possess significant competitive advantages in their industries are usually favored. Enablers of the transition, including companies focused on energy efficiency and smart grid infrastructure as well as those producing metals and minerals required for the energy transition, are poised to benefit.
The momentum of policy shifts may also open doors for the oil and gas industry to be part of the solution, particularly for traditional fossil fuel companies that are leveraging emerging technologies for sustainability and decarbonisation like bio energy and carbon capture. The goal is to identify companies that can demonstrate growth of a profitable transition business alongside a resilient oil and gas business."
Where should family enterprise investors be looking to enhance portfolio resilience for long-term risk-adjusted returns?
Jean Chia: "Given the longer-term investment horizons of family enterprises, infrastructure provides an excellent diversification option that also supports the ESG agenda. Southeast Asia will need significant investments to renew aging infrastructure, build foundations for urbanising economies, facilitate the transition to renewable energy sources for electrification and satiate the demands of an energy-intensive artificial intelligence (AI) and digital revolution.
As the current aging grid system is a bottleneck for the energy transition, the infrastructure ESG investment story starts with expansions and upgrades to smart grids. Smart grids, which use digital technologies, sensors and software, help optimise real-time supply and demand of electricity while minimising costs and maintaining network reliability. Media reports indicate that at least US$21.4t need to be invested in the electricity grid by 2050 to support the global net-zero trajectory.1
The infrastructure assets required for a smart grid are typically backed by contractual revenue streams with embedded inflation-adjustment and cost pass-through mechanisms. Hence, investors are shielded from the variability of real or inflation-adjusted income streams. Critical infrastructure assets in key locations also often carry stable, tangible valuations that can provide visibility and stability of returns for longer-term investors like family enterprises.
At the same time, as government grants, tax benefits and incentives may be available to providers and operators of infrastructure assets, investors may potentially enjoy favorable net returns. While the benefits of infrastructure investment are clear, family enterprises should beware of the risks inherent in the uncertain nature of developmental pathways. A diversified investment strategy with exposure spread over different geographies and industries is advised."
Family enterprises tend to focus on financial risk. How can prioritising ESG considerations help them take a more active and operational view of risk?
Praveen Tekchandani: "It is important to determine the definition of sustainability. Companies and family enterprises tend to consider sustainability through the environmental lens mainly because there has been a lot of progress and global conversations on climate change and net zero.
Traditionally, climate change is seen as a significant risk that companies and family enterprises need to consider, and this is manifested in the form of transition and physical risks. Transition risks include evolving regulations, the impact on carbon pricing and the need to respond to changing stakeholder and customer expectations, while physical risks refer to damage to assets or the value chain from the impact of climate change.
However, the true spirit of driving sustainability resides in defining it as a combination of success levers that makes the organisation successful in the long-term. As this immediately includes aspects like employee engagement, safety, ethics and governance, the focus should be on levers that create and conserve value for the organisation.
In short, prioritising sustainability can provide a structured framework for enterprises to manage risks while focusing on opportunities, helping the organisation achieve long-term success."
How can family enterprises pivot their innovation agenda to help realise opportunities that can potentially arise from having an ESG focus?
Praveen Tekchandani: "A focus on ESG can drive innovation by encouraging family enterprises to develop sustainable practices and products that differentiate them from competitors. Such innovation will depend on the industry and maturity of the ecosystem. It can include products or services with the goal of reducing the carbon footprint, controlling waste or promoting the circular economy.
The 2023 EY Future Consumer Index found that two-thirds of consumers globally were purchasing or considering the purchase of products that help protect against the impact of climate change. B2B customers are increasingly expecting green products and services too. Larger companies committed to net-zero pathways are seeking suppliers that can support their sustainability journey.
Governments are also providing support through tax benefits, cash grants and enterprise finance to help companies, including family enterprises, embark on or advance their ESG journey.
As companies seek to address ESG challenges, they can tap into digital technologies, such as AI, Internet of Things (IoT) and big data. Examples include implementing IoT sensors for real-time environmental monitoring, using AI to help optimise waste management or using data analytics for better decision-making in ESG strategies. This way, an ESG focus can help family enterprises enhance capabilities in emerging technologies, which can then be applied to drive efficiency or create value in other parts of the business."
Do you see younger family members stepping up to take the lead in ESG innovation?
Praveen Tekchandani: "We see the next generation being tasked to develop the culture of sustainability and generally take the lead in ESG innovation.
As organisations start to grapple with ESG, they typically go through a journey of awareness, acknowledgement and appreciation. At the awareness stage, the focus is largely on compliance. Leaders in sustainable practices acknowledge that going beyond compliance is in the best interests of the business. Organisations that are more mature on the ESG journey have an appreciation for development of the business strategy through the two lenses of risk and opportunity in ESG to drive long-term value. This is often led by younger family members who are more attuned to sustainability and passionate about it.
Prioritising sustainability for value creation is where the next generation is gravitating to and flourishing. ESG dimensions bring new priorities and new opportunities for younger family leaders to leave their mark in the world and their enterprise culture."
Bank of Singapore is the presenting title sponsor for the EY-Bank of Singapore Family Enterprise Award of Excellence 2024 and the EY-Bank of Singapore Asean Entrepreneurial Excellence Award 2024. Bank of Singapore, a wholly owned private banking subsidiary of OCBC, is also the platinum sponsor of the EY Entrepreneur Of The Year 2024 Singapore awards.
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