Asian private bank investors now investing in ESG structured products

Evidence is growing that ESG compliant companies are better managed companies and generate competitive advantage over their peers, according to DBS Private Bank

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High net worth (HNW) and ultra high net worth (UHNW) investors are now investing in structured products that can capture outperformance from environmental, social and governance (ESG) investments, disproving traditional perceptions that ESG investing compromises returns.

"The issue we face, and this is common among all investors in Asia, is the perception that if they invest based on ESG principles, they are actually compromising or giving up returns. But there's a lot of theory which supports why companies which are focused on ESG principles will actually outperform others in terms of their financial performance," says Rohit Jaisingh, executive director and head of Equity Products Advisory – Wealth for DBS Private Bank.

Recent evidence indicates that ESG compliant companies have access to lower cost capital, better stakeholder engagement, attract better talent, use their resources better, and are more focused on managing idiosyncratic risk better, Jaisingh says in an interview with The Asset.

"Eventually what will happen is they will be able to generate a competitive advantage over their peers, they will be able to transform that into higher profitability, lower cost of capital and ultimately higher valuations," he adds.

To prove this investment thesis, DBS Private Bank has launched a structured product that is basically a principal protected note based on the MSCI Emerging Markets Asia Index and the MSCI EM ESG Asia Leaders Index, in order to capture outperformance of Asian ESG compliant companies over their peers which are ESG compliant.

This is probably the first structured product of this kind in the market today.

"Based on backtesting, what we found was that the MSCI EM Asia ESG Leaders Index did outperform the MSCI EM Asia Index. Over a three-year time horizon, the average outperformance is about 12.7%, the minimum outperformance is about 4.9%, and the maximum outperformance has been almost 24%," Jaisingh says.

The building block of the structured product is a call option on the outperformance of the MSCI EM Asia ESG Leaders Index over the MSCI EM Asia Index.

The product is offered in two versions. In the first version, the option is wrapped in a warrant format which means the investor buys the warrant, pays the premium and gets the outperformance at maturity.

"This means that in case the MSCI EM Asia ESG Leaders Index outperforms the MSCI EM Asia Index, they get the outperformance. But if it underperforms they don't incur losses because they have purchased a call option and are not exposed to any downside risks," Jaisingh says.

In the second version, the same option is embedded in a principal protected note, also known as a "minimum redemption note". Since this is a principal protected note, at maturity the investor gets back the principal, a fixed return, plus the outperformance of the MSCI EM Asia ESG Leaders Index.

Jaisingh says DBS Private has executed five tranches of the note since it was launched early last month. He declined to give the exact amount raised, suffice to stress that it was a successful product launch.

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Date

29 Oct 2018

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