Global ESG Portfolios: Part 1

Last Updated on June 20, 2019 by Sultan Beardsley

This summer I’m living in Japan, uniquely positioning me to observe some of the key metrics for ESGs through a global lens. This article will be part one of a multi part series covering ESG funds around the globe, opportunities/risks presented by them and more. In this first piece we will take a look at ESG funds listed on the Tokyo stock exchange and make our way across the globe as we go in the subsequent articles.

Climate change and other related factors have increasingly lead to businesses being required to take a more proactive approach than was traditionally acceptable. In many cases investors find such ESG compliant strategies to not only be positive on a PR measure, but they tend to outperform similar organizations on similar measures. As this movement begins to expand into various industries, investors need to pay attention to the global opportunity created in its wake to efficiently steer portfolios to maximized gains.

In this article I will discuss the following;

• What Is ESG, Why Should I Care?
• ESG Fund In Japan
• Opportunties/Risks For Investors
• Conclusion On ESG Fund & Forward Looking Thoughts For Future Articles

What Is ESG, Why Do Should I Care?

ESG is best broken into three categories; Environmental, Social & Governance. These measures are used to quantify the sustainability and ethical impact of an investment. ESG has seen immense upside in recent years as investors begin to realize their money is safer in investments that screen against potential PR nightmares which are sure to diminish your capitol. This increase in volume, millennials maturing & other factors have assisted in making ESG funds on average significantly more profitable than traditional mutual funds. With concerns looming closer and closer on environmental measures, businesses are increasingly being expected to proactively solve these problems prior to regulation. Properly placing investments in companies who position accordingly has made many ESG funds massive amounts of money and is forecasted to continue for the foreseeable future.

ESG Funds In Japan

The Tokyo stock exchange lists numerous ESG funds & ETFs, many of which have consistently booked sizable upside. JPX-Nikkei 400 has attracted many investors attention in recent years with returns coming in at +48.37% at market price for the last year. Shares are listed at 19,600 JPY which roughly equates to $180.919 at the current spot rate (June 17). This fund being a leveraged index fund exposes investors to a significant amount of exposure to the underlying asset. For those of you unaware, a triple leveraged S&P 500 ETF will yield 3x the daily performance of the underlying index. This makes investments in leveraged funds incredibly risky, but also presents a great deal of opportunity if wisely placed. JPX-Nikkei 400 is managed by Nomura Asset Management Company. The company is headquartered in Tokyo and is said to manage roughly $425 billion in assets. This capitol has positioned Nomura with 240 portfolio managers world wide and 109 research professionals. ESG is advertised as being at the forefront of Nomura’s strategy as they “became a signatory of the United Nations-backed Principles for Responsible Investment (UN PRI) in March 2011.” A further dive into their communications regarding strategy and stance on ESG aligns with many investors beliefs regarding its pain points and significance in the up coming opportunities presented to investors. On average, Nomura’s strategy has yielded positive results. The diminishing factor to Nomura’s returns is primarily within unsatisfactory performance by Waters & Pentair. Overall, Nomura’s strategy when it comes to ESG appears to have few flaws. The company focuses on “investment in businesses exhibiting high sustainable value creation, at discount valuation.” As seen in the chart (source; Nomura.com) Nomura’s strategy has proven successful more times than not. For a further view of the individual equities which are held within this fund and a reason for buying please click here. After reading the portfolios diversity and reasons for investment, the picture becomes relatively appealing to long term bulls looking to grow capitol at a relatively reduced risk when contrasted with traditional mutual funds. This conclusion can be drawn as Nomura’sGlobal Sustainable Equity managed to remain positive after the massive market downturn experienced in October-December and has since rebounded to the tune of nearly 20%. Historical data supports a bullish thesis as cumulative returns have been consistent and appear to mitigate some risks associated with the traditional indexes.

Risks

Although risks are significantly mitigated with the ESG approach they are still apparent. The primary risks in ESG appear to be vested in confusion. Investors seem to have little universal understanding and standards for ESG compliance. This may yield a field with high forecasted growth and predatory funds seeking to cash in on the influx of investment, but not following true ESG standards. Ultimately if ESG continues to grow at its current pace, it will inevitably be incorporated into a set of standards companies have to report on (the IFRS in Latin America is working on this), but as it stands; ESG lacks standardized compliance.

Many companies get an ESG pass simply by putting up some promising percentage increase in their sustainability reports. These have often been found to lack substance and are not wise grounds for an investment. On the flip side, true ESG compliance should alert funds such as Nomura’s potential risks to their capitol with companies such as Facebook facing PR nightmares. Although Nomura is considerably transparent with their ESG efforts, as an investor I would like further clarification on the grounds that dictate whether a company meets ESG criteria within their firm. The charts and historical data support that they have positioned their efforts in a “true” ESG approach, but I would require further validation should my money be on the line.

Conclusion

ESG has an extremely promising future, but has several current pain points that need to be effectively addressed as to withstand the forecasted increase in volume. Should this be properly solution, the data strongly favors an argument for ESG becoming a significant portion of everyone’s portfolios. The opportunity for ESG isn’t just in the United States, in fact other countries have caught up with or passed us on an investment measure in this opportunity. Japans exchange is an exciting place and lists a handful of ESG focused ETFs & funds who are constantly outpacing US indexes and funds. Nomura is at the forefront of this opportunity in Japan and has a wide array of ESG solutions that are globally positioned to maximize profits from undervalued and ESG compliant equities. Nomura is very transparent with its efforts in ESG and they appear to be paying off with returns outpacing the market on multiple measures at times. For the long term bull and investors who have less time to constantly monitor positions, there certainly appears to be a strong argument for investment. Personally, I like Nomura’s ESG funds and will continue monitoring for entry once we reach a clearer position with tariffs.

In future pieces I will do deep dives on ESG funds around the world, their underlying equities, performance and much more. This initial piece is intended to give readers a taste of ESG and its performance in Japan.

I was not compensated by Nomura to write this piece and at the time of writing have no position. I may or may not choose to invest as market conditions shift.