3 Reasons to Buy and Hold This SGX-Listed Low Carbon ETF

Investing stocks wealth

Tim Phillips

September 29, 2022

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In Singapore, and around the world, the aim to invest sustainably is becoming more important than ever. That’s because stocks with sustainable business models are built to endure.

While Environmental, Social, and Governance (ESG) investing can be hard to grasp, it might be simpler for investors to focus on a key metric; carbon.

That’s because carbon emissions are directly linked to the Net Zero pledge on carbon emissions, that was formulated in line with the Paris Agreement of 2016.

Given carbon emissions is a straightforward way of measuring a firm’s impact on the environment, it stands to reason that less carbon-intensive companies are capable of generating superior shareholder returns over the long term.

But how can investors in Asia play this trend locally? This week, CGS-CIMB and CSOP launched a new exchange-traded fund (ETF) on the Singapore Exchange (SGX) that tracks carbon-efficient companies in the Asia-Pacific region.

Named the CSOP CGS-CIMB FTSE Asia Pacific Low Carbon Index ETF (SGX: LCS) (SGX: LCU), the ETF offers shares in both Singapore and US dollars, and tracks the FTSE Asia Pacific Low Carbon Select Index.

Without any further ado, here are three reasons why investors can buy and hold this SGX-listed low carbon ETF.

1. Asian markets could outperform in the near term

The bear market in US stocks has made headlines everywhere given record-high inflation. However, Asia isn’t faced with the same inflation conundrum as Western economies.

In addition, with US markets falling hard so far in 2022, attention has turned to value stocks. That should benefit Asia in the near term given the abundance of value in the region.

So, any continuation of the US bear market could see Asian markets delivering relative outperformance (see below). That’s mainly down to the fact that large fund flows will seek alternatives.

Asia US markets outperformance

Source: CGS-CIMB Research, Refinitiv

2. ESG investing can be more effective in Emerging Markets

While the conventional wisdom is to think that a lot of ESG “leaders” come from the US or Europe, Emerging Markets in fact sees the biggest benefit.

Taking a look at the below, it’s clear that the MSCI Emerging Markets ESG Leaders Index significantly outperformed the basic MSCI Emerging Markets Index.

However, the same cannot be said for the MSCI World ESG Leaders Index versus the MSCI World Index. There, the performance of the two was pretty much exactly the same.

Given the more mature and sophisticated ESG investment strategies in Developed Markets, the excess returns are not as significant. Clearly, in Emerging Markets, the impact of ESG strategies is a lot more effective.

ESG indices outperformance

Source: MSCI

3. Buy low carbon in Asia at low cost

Given the rise of sustainable investing assets, it’s clearly important to have some exposure to this theme over the long term as Asia decarbonises.

It’s also useful to remember that on the SGX, investors can now buy just one single share when investing in ETFs. The previously required “100 shares lot” no longer applies to SGX-listed ETFs.

That makes it incredibly accessible for everyday investors to put small amounts of money to work in an ETF by utilising a dollar cost averaging (DCA) approach.

With a near-40% weighting in Japan via the ETF, investors will also have an overweight to technology hardware and equipment, banks, software, and autos in Asia.

Focus on climate change and diversification

As it has become clear to all investors, the climate threat to the planet is real. To help the with this, a low carbon ETF focused on Asia provides a unique way to gain exposure to the decarbonization process in the region.

Given there’s much more to be done in Asia on the climate front – versus the US and Europe – being able to easily measure progress via carbon emissions makes the investment process that much more accountable.

Finally, investing into carbon-efficient companies is also a responsible risk management strategy. Given changing regulations and policy shifts, investors need to ensure that the companies they’re invested in are leading the charge towards a carbon-free future.

Disclaimer: ProsperUs Head of Content & Investment Lead Tim Phillips doesn’t own shares of any companies mentioned.

About the Author: Tim Phillips

Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth. He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be. He is also a certified SGX Academy Trainer. In his spare time, Tim enjoys running after his two young sons, playing football and practicing yoga.