Why ESG should be part of your investment portfolio, with Sunita Subramoniam, APAC Head of ETF and Index Investments Sustainable, BlackRock

Episode summary

Sunita Subramoniam joins Philipp to discuss why you need to include sustainable investments in your investment portfolio.

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Episode transcript

Philipp: Welcome to another episode of In Your Best Interest, your personal finance podcast. I’m your host Philipp Muedder, and today we will be chatting about a topic that I’ve been super interested in for a long time now. It's gained, I think, even more traction this year than it ever has, and that is investing sustainably.

Maybe you also heard the term “ESG investments”. So we’ll get into that topic in a second, and we will learn from probably one of the best. And so we have the pleasure of having Sunita Subramoniam from BlackRock with us on the show. Sunita is the APAC Head of Sustainable for the ETF and Index Business at BlackRock.

She's actually based in Hong Kong. Sunita is responsible for both developing the narrative of sustainable investing in the region, and consulting with and providing expertise to clients on all sustainable indexing discussions and initiatives. Sunita plays a key role in the development and commercialisation of locally-listed sustainable ESG ETFs as well.

Sunita graduated with first-class honours from NTU in Singapore, with a degree in electrical and electronic engineering. She also has an MBA degree from INSEAD and is also a [02:00] CFA Charter holder. Welcome, Sunita, to the show; that's quite the intro there.

Sunita: Thank you for having me, Philipp, the pleasure's all mine.

Philipp: Yes. It's great to have you here. I think we have not covered this topic in-depth in previous episodes, but you know it's on a lot of people's minds. You know, at StashAway as well, a lot of clients have been asking about learning more about ESG and also using it in their portfolio.

So I really want to go back to actually where it all started from. But before we do this, if you've listened to our podcast before, we like to ask some personal questions to get to know you a little bit better before we get into the topic.

Sunita: Sure.

Philipp: And it's always very interesting to hear from different guests have different answers to the same questions. And it makes it a very personable moment for the listeners, and they always learn something about the person. So with that being said, I know you went to university in Singapore at NTU, but where is Sunita born? Where is she from?

Sunita: So I’m originally from India. I was born in Bombay; my family still lives there. But I’ve been outside of the country since the age of 17; I’m not going to give away my age on a podcast. But I’ve been out of the country for many years now. So I studied in Singapore, I worked in Singapore for a little bit, moved to New York for a little bit. And I’ve been calling Hong Kong my home for the past several years. It's been exciting, and I really enjoy what I do.

Philipp: Yes, that's great. I always like speaking to people that have been around the world, because I think that's one of the things in life that is invaluable to do, so I think that gives you so much in life I always tell people [04:00] when they ask “hey, what's the one thing that you would never change about your life?”, it’s living in different countries.

Sunita: Yes, travel, it's very valuable.

Philipp: Yes. You learn a lot, you learn a lot about yourself as well, and especially when you're still looking out career-wise what you want to do. It's a very important thing for people to do if they have the chance to do it. So how does someone who studied electrical and electronic engineering at NTU in Singapore end up at BlackRock working with ETFs?

Sunita: Well, it's a long journey, but it's been a fun one. I've been in financial services for my entire career. I worked a little bit, and then I worked in Santander, which is a Spanish bank, for a few years; I was covering Latin American equities there. And then I worked in wealth management for a few years where I was implementing ETF model portfolios; it's quite similar to what StashAway does.

And I think ETFs are the future of investing. I think they're a fantastic tool for achieving long-term good financial outcomes for clients, and that's how I ended up at BlackRock. I've always been into sustainability; I mean, as a child, I used to write to the World Wildlife Fund. I've always been passionate about the environment and doing right by it. So I love my job because I get to combine two things that I like: investing and sustainability.

Philipp: That's a good story, and what an outcome, right? Now that you get to actually earn a living from one of your passions. So that's always good to hear. So did you have any plans to go into finance [06:00] though when you were younger? What was growing up like in terms of personal finances? This is something your parents have taught you? Did you kind of learn it yourself on the go?

Sunita: I wanted to be a zoologist when I was younger, so no. The short answer is no. I think I’ve liked working in this industry because you get to be close to a very dynamic part of the way economies work. It's an important life skill as well. And I’ve believed in financial empowerment for a very long time.

So at least in my personal life, I have always been very keen to invest and be responsible for that aspect. It's a part of your health. We talk about physical health, mental health; I think financial health is an important part of overall well-being.

Philipp: Absolutely, and I think a lot of companies are actually catching on to this as well, especially now in Southeast Asia. In the US, it's very common that you have financial wellness programs being offered at companies for the employees.

And I think you hit the nail on the head there, right? It is a part of your personal well-being. Yes, that's great. So a couple of other questions that we do ask any guest that comes onto the show is: your first paycheck after college, do you remember what you bought with that?

Sunita: Yes, I do remember. I’m going to start by proving that I was a responsible adult, even at a young age. So my paycheck always went towards first paying down my student loan instalments. But after that, actually, this was my first bonus, not my first paycheck. My first bonus paycheck, I bought a [08:00] Coach bag.

Philipp: Hey, that's good. It's a long journey, the personal finance journey. So I tell people to have some fun with it, right? Otherwise, it's a very long road. So in order to keep up with it, you need to do this.

Sunita: Yes.

Philipp: Absolutely, good. And then, the last question before we get to sustainable investing is, what would you say is the best investment that you have ever made? And it doesn't have to be a financial investment.

Sunita: Yes. And there's a variety of ways you can invest in yourself, and it's obviously a journey throughout life. But I think the best investment I ever made was, it's actually a switch. A switch of my investing style from using expensive products and expensive platforms to low-cost products and low-cost platforms.

So using brokerage accounts to trade directly in stocks and ETFs was the best decision I ever made. I did that about six or seven years ago, but I’m so glad I did that because the trajectory of my financial portfolio has been very different since I did that.

Philipp: Yes, super interesting story. And thank you for sharing those with us; I know the audience will really appreciate this when they listen to this. But like I said, let's switch gears and get to the topic of sustainable investing; that's really why we have you on. You are the specialist here, so I can't wait to hear all these answers from you.

Because I have a lot of questions, and like I said, I’m really excited to learn actually more about it. Because the first time I heard about the topic was maybe five, six years ago that it really came up. I think it was a client back in the US that was asking about it. And I believe most of our listeners have heard about it in one way or the other.

But it would be really great [10:00] to set the stage today by going a little bit backwards and thinking about what sustainable investing actually really means, right? Before we tackle some other questions. But what does it mean, and where did it come from for historical sense and purposes?

Sunita: Sure. I would say that what sustainable investing really is at the heart of it is when you combine non-financial data and insights, specifically ESG, environmental, social, and governance insights, with the traditional insights that you would normally use to assess a portfolio. I know that for a lot of people, that might sound like something very new.

Because in our minds, historically, it's been ingrained to think that sustainable investing is just, you don't buy stocks, or you don't buy certain types of things, you don't invest in certain things, and that's the way to go sustainably. I think that's one way of doing it, but I don't think that's the ethos of sustainable investing.

There are a lot of challenges in front of us in the world right now. To me, sustainable investing is a way to align your capital with not only what benefits businesses and what benefits portfolios, but also what benefits the planet. I think at the essence of it, that's what sustainable investing is.

Philipp: And I think that's a good overall definition. So let's say a lot of people think that social investing or investing for the environment doesn't get the same returns, right? That's often thrown out there when you hear like yes, of course, I care, [12:00] and I would like to do better. But how do I even figure out where to start, right?

Sunita: Yes. And I can completely appreciate where people are coming from. And I think it has again a lot to do with how you define sustainable investing, or how it's been marketed in the past. I think the new way of looking at it is to think of your portfolio, your multi-asset portfolio, with equities from different markets, and fixed income products from different markets. 

How can we substitute each of those markets and building blocks in your portfolio with the sustainable equivalent? In other words, if you want to invest in a universe of US stocks, can I invest in a universe of more sustainable US stocks? Because if I do something like that, I can build a portfolio that's very well diversified. But at the same time, also aligned with my objectives.

And that's the approach that we've been taking at BlackRock, that's what we think has been performing in line with expectations as well. I mean, this year, we've seen tremendous flows into our sustainable ETFs and products. It's been much more, like since 2019; it's been an inflexion point. Part of that reason is performance. I mean, if you look at some of our products and strategies, there has been, some of them are performing in line, but a lot of them are actually outperforming the traditional market benchmarks. As in when you compare like for like. 

So more and more investors are incorporating these sustainability considerations because they've realised that there is no longer a return sacrifice when it comes [14:00] to sustainable products. And I want to just switch gears a little bit, and think about why that is. If you think about environmental risks, what are environmental risks? It's about how companies are addressing issues like climate change, pollution, how they are responding to opportunities in climate change like cleantech and renewable energy and electric vehicles.

We think about social issues, how companies are managing talent, how they are managing data privacy, product safety if you're, say, a drug company. Governance issues: how are they dealing with, and managing shareholder interests, accounting practices, ethics, board independence.

These are all issues investors care about because they have a direct impact on the way a company's business performs. And so what we're seeing is that the market has actually been rewarding better run companies from an ESG perspective.

And conversely, oftentimes, the market has punished companies that did not do so well from the perspective of ESG risk. Think about, let's say, a company that exposed the data of their users, like a tech company that did something like that.

Or a mining company that destroyed something that was important to the local tribes. These are examples of risks that were managed not so well, and the market did not like that. So even investors who don't know that they care about ESG actually care about ESG.

Philipp: Yes. Without even realising it, right?

Sunita: Without even realising it.

Philipp: Yes. So then that's a really good overview, and I think showing us [16:00] what it means in ESG, the environmental, social, and governance, criteria that was very interesting to hear from you. So sustainable investing though, even though you just kind of showed us the umbrella, can mean different things in different parts of the world, right?

Because we also have emerging markets, we have developing markets. We have developed markets. So what do you see around the world in terms of sustainable investing? Any kind of difference in what they look for in each of these markets?

Sunita: I think the frameworks should be quite consistent across markets. But I would add that when you're evaluating companies, typically you want to look at the issues that are material to their business. What I mean by that is lately, we are in a golden age of ESG investing. I think we have much more data right now than we ever did in the past.

To give you a sense of this, I mean in 2011, only about 20 percent of companies on the S&P 500 were reporting their ESG metrics. Now fast forward to 2018, that ratio is flipped; about 86 percent are reporting ESG data. With the availability and proliferation of data, we have more tools and more available to us to be able to analyse businesses and how they manage their ESG risks.

However, we have to make sure that we analyse the right data. In other words, figure out what is material to that business. If you analyse a mining company on data privacy, and if you analyse a tech company on pollution, that's probably not material to their business. Now flip that around, [18:00] look at how a mining company manages its environmental risks and look at how a tech company manages data privacy. Now you have a good handle on ESG materiality.

So that's the more relevant piece here. We are getting to a point where whether it's in emerging markets or developed markets, there is enough data available on companies to be able to build well-diversified portfolios. And I’m speaking from, coming from the indexing business, as we have all this data, we're able to construct very interesting and nuanced indexes, and therefore interesting and nuanced products for accessing markets in a relevant and future-forward way.

Philipp: Yes. And you just mentioned one way for investors to get access to these is ETFs. But how, for example, can one look at their current portfolio and say, hey, I would like to understand if I am sustainably, consciously invested, or if I am actually completely the opposite in my portfolio? Because it's still difficult for people to tell, right?

Because let's say you're buying the S&P 500 ETF, and maybe you have a Gold ETF in your portfolio and some a global world bond portfolio. What are some ways that people can actually, if they listen today, and they think like oh, I thought I was maybe sustainably investing, but can I actually take a look at that?

Sunita: Yes. And I think you've hit on this great point around transparency, right? You have to know where you stand in order to figure out where you want to go. And so that's a very good question. So one thing that BlackRock has done because we do care a lot about this transparency element [20:00] is we have actually made public the ESG metrics of our products.

So when you mention the S&P 500 index, for example, we can go to the S&P 500 ETF page and access the ESG metrics of that ETF. And figure out, okay, how does this ETF compare to the peer group, is that a good score, a bad score, and so on. There are going to be certain areas that you might not want to invest in. That's where exclusionary ETFs come in.

We have many products that actually screen out certain sectors, and so that's a very easy switch for you to make. Let's say you switch from a Europe ETF to a Europe screen DTF, and immediately your product sustainability profile improves a little bit. Because you don't have exposure to some problematic businesses anymore, that's a good starting point.

For investors who want to go a little bit more, there are more high-conviction strategies that you could consider. But either way, I would stress on this idea of substitution, of sustainable building blocks for regular building blocks. Because any portfolio, as you rightly pointed out, would probably be made of some US equities, some emerging market equities, some global bonds, some Gold, and so on.

Think about what are the sustainable substitutes for some of those building blocks. That's the best way to build a very holistic diversified portfolio, where you are aligning your goal, not only your financial goals because this portfolio is aligned with your risk profile and risk tolerance. But you're also aligning it with your sustainability objectives.

Philipp: Yes. And I think that's a great way to do it, so screen portfolios is a good choice for people to take a look at and do some extensive research on. Again, you can also screen as Sunita was just mentioning [22:00], look at your portfolio; there are various tools that you can actually take and see what your ESG scores are nowadays. And then again, substitute or make some changes to the portfolio. But many of us, I’m assuming, want to do the right thing, right? By the environment.

People are eating less meat, or maybe they go in for these meat substitutes nowadays, and you see the stock prices going crazy. They take public transportation instead, or flying less, right? That's a big topic the last two years over in Europe. Every time I come, some people say oh, you're flying quite a bit. I have never heard this before, but it's much in the news as well.

And especially in Europe, more so than the US. But those are all things individuals can actually see, or you can get them to think about, and they think it's oh; I’m making an impact, right? I’m actually not doing this in the grand scheme of things, maybe I’m just one of many, but at least I’m doing what I can.

When it comes to investing, it seems always a little bit oh, it's the big institutions that own most other percentages in the companies, can actually advocate for change in these companies, right? So how do you see that for, how do you get people to think about investing, and then also think they can make a change there?

Sunita: Yes. There was a very interesting study done in the Nordics quite recently, around exactly those examples that you mentioned. What do you think is the most effective way to bring about change of those options, eating less meat or taking public transport, or showering less, taking less flights, and so on.

Actually, investing in sustainable, like a sustainable alternative in your portfolio, is 27 times more effective than all the other things combined. I think a lot of investors, a lot of people underestimate the effect that [24:00] direction of capital has. Directing capital towards more sustainable businesses not only helps those sustainable businesses, but also gives the other businesses in the market a sort of sign to say if you improve your business practices, your sustainability practices.

If you improve your ESG rating, you'll perhaps have a share in that as well. And we're actually seeing this in a very real way in the sense that many businesses or many poorly rated companies are having trouble raising capital at the same rates as their sustainable counterparts. So this is very real; it's not just the remit of institutional investors, though obviously, it is a very important piece there. But yes, it cannot be underestimated.

Philipp: Yes, agreed. And I think we talked about a lot of the opportunities and the market in terms of how it's been developing, and how positive it is for change. Are there risks involved though still in sustainable investing, and what are those risks?

Sunita: I would rephrase the question. I would say, what are the ESG risks, and those are the risks I mentioned earlier on, which is around how companies manage things like climate change and natural resources, and human capital and accounting and all of that. These are real risks, and whether we like it or not, it's going to have an impact in the way companies run their businesses going forward.

There is no deniability around things like climate change. Now what we're seeing is the economic cost associated with climate change-related disasters is like close to tripled [26:00] over the last 20 years. In the meantime, investor preferences are changing. Young investors, I mean not even that young, I would say millennials, Gen Z are all expressing interest in sustainable investing.

And in the meantime, institutional investors are integrating sustainability into their portfolios in a big way. So in other words, I think the risk is actually missing out because I think there's this huge shift of capital that's happening towards sustainable businesses. We're already seeing that in places like Europe, and the risk is missing out.

Philipp: No, absolutely, and thanks for rephrasing this, and making it more about an opportunity, I do appreciate that. You were saying, though, that with these opportunities, that the risk is actually not taking part in it, not changing the company culture and how they think about these things. How do you see the involvement of governments though? I think obviously there is a lot of, some like Europe very big into sustainability, right? There are the different parties, I just can tell out of experience in Germany. There's a green party who has tremendous momentum at the moment over the last few years. Because like you said, also the younger people, the millennials, they really care.

They even care less than the profits probably; they actually care about making an impact in the world, because they're going to be here for a long time, right? So they want to have the earth being healthy as well. But then you see, on the other hand, governments like the US currently, the current administration who is saying, well or reducing at least it seems from a news flow, right? That they're trying to be more on the other side.

We're doing more fracking, right? We're doing offshore drilling for oil, we want to do mining again, and all these have impacts. [28:00] I’ve just recently just read the report again where in all the regions where they had fracking, how many microearthquakes they've been having over time.

So it's obviously doing something bad, you can't deny that. But how do governments then play a part, or do you see actually as you said, capitalism at its prime by actually assets still get allocated differently nowadays, no matter what the government says?

Sunita: Yes, and this is a billion-dollar question; I mean, it's not an easy one to answer. But what I would say is that in this space, as you've rightly alluded, there are multiple stakeholders around multiple markets. There are governments, policymakers, industry participants; I mean asset managers like ourselves. Asset owners around the world, sovereign wealth funds, pensions, managing huge sums of money.

I think the situation is more. I’m more optimistic about this situation; I think it's more hopeful. There are movements of foot in various arenas that will sort of conspire to make this happen, in my opinion. There will be regional and local nuances for sure, and that's certainly true in Asia pack, in this region where we see different countries in different stages of their sustainability journey if you will.

It's playing out in different ways with different stakeholders. We've got the exchange and pensions in some countries that are driving this, the sovereign wealth funds in other countries. Regulators instil others. So I think it will take a village.

Philipp: Yes, a big one.

Sunita: Yes.

Philipp: It seems to be happening like you said, I think that the allocation of assets people underestimate [30:00], right? How the market actually does its thing, compared to even when governments say other things. I think this is like you said rightly so a big part.

So Sunita, we're now in September of 2020, and it's been a very long year for all of us, I think. But sustainable investing in the context of the pandemic, right? It seems to become more and more important. So why do you think that is, and how is that playing out this year?

Sunita: Yes, absolutely. It really has been quite a challenging year. I think going into it, no one had any idea that we would be in this for this long. So yes, it's been tricky. I think the pandemic has actually made sustainable investing even more relevant than it was before. And I’m not the only one seeing that, I mean as I said earlier, there's been tremendous inflows into sustainable strategies around the world.

So investors are recognising that these things are very important and will be more important going forward. In the post-COVID world, social and governance issues have really come to the forefront. And when I say that, I mean think about how companies, how corporates have responded to COVID.

There are many bad examples, companies that have let talent go, and it begs the question of how they will be able to attract talent when they come back and when the economy recovers.

On the other hand, there are great examples of corporations that have made very business-forward decisions, very long-term positive decisions, difficult decisions. I saw an example, for in instance in a health insurance [32:00] company extended cover for COVID for all of its policyholders. It's a difficult decision to make, but it really enforces goodwill. Another very famous French fashion company actually retooled their perfume factories to produce hand sanitizer.

So there are lots of great examples of good corporate behaviour in this environment. But environmental factors are still going to be relevant, things like biodiversity and the way human habitats are encroaching on animal habitats. That has implications for disease transfer. Air pollution and the impact that that has on our lung capacities, and our abilities to recover from a respiratory disease like COVID.

These factors are going to remain important. So I think ESG factors are going to stay; this is the new normal. We are going to have to consider these when we consider our broad investments. And even some of the thematic investments in the environmental space are becoming very interesting and mainstream to investors.

We've seen a lot of interest in things like clean energy because whether you think about Europe or China, there is a great transition happening to the lower-carbon economy. People are buying more electric vehicles; cities in China are now entirely running on solar power. So there are transitions afoot now that will become more and more powerful.

Think about as populations move, more and more populations move into cities, what are the infrastructure investments needed to make those cities support the needs of the people moving there. [34:00] That's why we have things like water management, waste management. These are all examples of schematic ESG areas that will be more and more relevant in the years to come. 

Philipp: No. And I think one thing I would like to follow up on there: when you said the trends of people moving into cities which we've seen a lot over the last ten years’ time, right? Do you still think this is going to be the way in your view going forward still going to go strong?

Because I see, at least I hear, a lot of people and friends and family talk about hey, we’d rather go back out, we want some space, right? Because we were in an apartment in a city. But if we go out into a more remote place, I can actually afford a house with a garden. So how do you see this playing out? And same also for companies, right? Because companies will think a lot more about having huge office spaces in the city centres, when remote work kind of works, right?

Sunita: Yes. This is a very interesting question. I don't have the straight answer for that, so let me try and answer it a little bit. I think that climate change definitely has implications for cities. When you think about a lot of cities being on waterfronts and rising ocean levels, what implications does that have for those cities? Certainly, there are questions that need to be answered, problems that need to be solved.

But I’m an eternal optimist, so I feel like there will be solutions coming out of it. And businesses, governments, like I said, there are multiple stakeholders that will come together to [36:00] find those solutions. I mean, having said that, I would definitely love to have a home or a second one in a less urban environment.

I'm sure that's part of the dream that a lot of people are saving towards: having a nice home in retirement. For myself, I don't know where that's going to be, but it's the journey that's as important.

Philipp: Yes, it is. No, it's just an interesting topic, because I think there is a lot on people's minds right now, right? Because I think one thing that the pandemic taught us is that you are spending a lot more time in your home. I think it's probably the most time spent at home for a lot of us in one tight period.

But yes, it's challenging, but I like what you said you're an eternal optimist, so I do really appreciate that, and I try to beam on myself as well. So it's a good way to live life. So Sunita, I think we covered quite a few things today. I think I learned a lot. I think the listeners learned a lot. If there would be one or two things that you want to leave them with when it comes to the topic of sustainable investments, what would they be?

Sunita: Yes. First of all, I'll say thank you Philipp and all of the StashAway team for your support in making this podcast happen. I’ve definitely had a really fantastic experience doing this with you. If I had to pick some final messages, key thoughts, I would say that this is very important for the world we live in right now, and the world we want to live in going forward.

This is happening. Sustainable investing is not a niche anymore; it is mainstream. [38:00] And at some point, I’m hopeful that this is the only way that we will invest going forward. In the meantime, I think I will say that there are a lot of forces afoot that are contributing to tremendous growth and momentum in sustainable investing. Specifically, in investing and accessing sustainable products solutions like exchange-traded on PCS.

So I would encourage the listeners to look out for that because you'd no longer have to give up returns to invest sustainably. You should be able to create entire, well-diversified global portfolios of sustainable companies. And I think that's great, that's good for the future. It gave the direction of capital.

And you're able to do this at a fraction of the cost, of going active, or able to do it at a very similar cost as a plain vanilla portfolio. So really, the question is not why do sustainable investing, it's why not? And I think I’ll leave you with that.

Philipp: Yes. And I love that last sentence, why not? Exactly right. I think demystifying the risks or what people were worried about when investing sustainably, and how you turn that around into thinking about the opportunities instead or opportunities not to do was a great thing to learn today. So thank you so much, Sunita, for your time; I really appreciate it. I know you're very busy, so thank you again so much for taking the time with us today.

Sunita: Thank you very much, have a great day, everyone.

Episode notes

In this episode, Philipp and Sunita Subramoniam, APAC Head of ETF and Index Investments Sustainable at BlackRock, talk about why investing in ESG is getting even more important today not just for your financial future but also for the future of the world itself.  

For past guests, visit stashaway.com/podcast

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Episode contributors

  • Philipp Muedder (Head of Financial Planning at StashAway)
  • Sunita Subramoniam (APAC Head of ETF and Index Investments Sustainable at BlackRock)