Climate change and environmental degradation are no longer warnings to be heeded for future generations. From plastic-choked oceans to uncontrollable extreme weather events like floods and wildfires, the problems long heralded by climate and environmental scientists are here today, and are only getting worse.
In response the investment community is increasingly taking action to ensure that their financial decisions do not have a negative impact on the well-being of our planet, in the meantime, the Covid-19 crisis has thrown ESG investing into the spotlight, and some fund groups are using the pandemic to push for positive change. We are at an inflection point in ESG investing, and here's why.
ESG – environmental, social and governance – factors as part of an investment strategy is no longer a gimmick or “greenwashing” – a nod to corporate social responsibility (CSR) –but is increasingly a built-in part of many investors’ strategy.
According to the Global Sustainable Investment Alliance (GSIA), investment in sustainable investing assets across Europe, the US, Japan, Canada, and Australia and New Zealand rose to US$30.7 trillion by the start of 2018, an increase of 34% increase over 2016 figures.
BlackRock, one of the world’s leading investment funds, stated earlier this year that sustainability should be “our new standard for investing,” insisting that even today “sustainability- and climate-integrated portfolios can provide better risk-adjusted returns to investors.”
While uptake has been slower in Greater China than in other parts of the world, ESG analysis has become an increasingly important part of the investment process for many investors.
“We should hold our investees to the same standard that we hold our own business to. We went down the ESG/sustainable finance route because we identified that it was a new way of calling what we call good business,” says Michael Au, Managing Director of District Capital, a family-run, Hong Kong based investment firm.
“We cannot only rely on financial data that’s been disclosed on annual reports, ESG gives non-financial data to better understand businesses in a holistic manner, and the risks involved such as climate risks and other new financial risks that we are seeing in the world today, he says.
Going forward, Hong Kong can seize a “great opportunity” if it can capitalize on being a hub for green finance and ESG reporting, says Au.
Recent advances in technology have vastly reduced the costs and ease of accounting and reporting on ESG data, says Au, giving management and boards the ability to see, in real time, its impact on their bottom lines.
“[In the middle of the pandemic] there’s a heightened interest in health and biotech and public health, so that’s understandable,” says Au. “We’re seeing a lot of very big movements in the market in response to that. The second which is a rising trend is the collection and rise of ESG data … how companies not only collect ESG data but collect it from their frontlines and take it back to the hands of decision makers. That kind of data service has a lot of room to grow.”
“I expect we’re going to be seeing a lot of innovations in the ESG accounting space coming out of China because there’s a pure need for it. There’s a wide range of heavy industries, manufacturing, that a lot of the established markets don’t have within the ecosystem that we will have to account for in China, that will make a lot of the adjacent service providers for ESG a huge opportunity.”
“A long-term sustainable future profit can only be realised if we have sustainable resources and a supportive community.”
While more and more investors – and the companies they invest in – are serious about baking their sustainability goals in for ethical reasons, the bottom line remains a key factor, says Entela Benz-Saliasi, CEO & co-founder of Intensel Limited, a climate risk analytics firm and Adjunct Associate Finance Professor at HKUST Business School.
“It’s not about ticking the box, which most companies still do, it’s more about recognising the impact of the environment and climate on the bottom line, on your business operations. Measuring these risks enable the companies to react to E, S and climate information in a meaningful way,” she says.
At the end of 2019, Hong Kong’s stock exchange amended its requirements for ESG reporting to improve ESG governance and disclosure, an indication of the relevance of these non-financial factors for investors in the SAR.
The increased focus on ESG, by investors, regulators and governments in Hong Kong and across the region is welcome news for a number of companies, particularly startups with a focus on using tech to improve the environment and to help in the urgent push to slow the planet’s environmental degradation.
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Sustainability is Pivotal to Good Business
ESG is not just window dressing or compliance, or even risk management but an opportunity, Au says.
“It’s getting easier – the writing’s on the wall,” he says. Before companies or investors can come around to embracing ESG as a core tenet to their business strategies, they tend to think about the tradeoff, if they are focusing on sustainability, are they sacrificing [returns]? That’s something we’ve disproven.
Once companies accept that sustainability is something that’s here to stay and needs to be built in for resilience, he says there is a process towards embracing this new way of thinking.
“The first in compliance, they do the bare minimum that’s required, to get through regulations. The second is risk mitigation, as they realise that they’re risking their future. The third, the upper echelon, are the companies that see the opportunity – this is not only climate risk, for example, but it’s actually an opportunity for them to grow.”
He cites the energy giant BP as a company looking to diversify and trying to do more and invest in hydrogen as an alternative fuel, because they know that fossil fuels are no longer able to sustain their business long term.
“People go from ignoring to doubt, to compliance and risk mitigation to opportunity.”
Sustainable investing is growing steadily in Asia, particularly in family offices and private investors, they are beginning to see longer-term plays, and turning their heads to startups that are focused on ESG, similar to investors in other parts of the world.
Much of the push is being led by younger investors, he says. “I don’t think there’s any question that the climate crisis is real, and we’re on the cusp of passing the point of no return and we need to move quickly. For most of the next generation [of investors], this is very high on their agenda.”
As an early adopter, he hopes that others will come on board and realise the benefits of investing in our shared future, not just financial return. Indeed, he says it’s critical that investors come round to the sort of ideas that companies drive sustainable innovations.
“The solutions [they’re offering] are what we need to advance a more sustainable earth. Is there enough money being put towards it? No, not even close. The deficit of what needs to be spent towards the sustainable deficit goals and what’s actually being put towards it, I think it’s one tenth, or even less. It’s not enough but that doesn’t mean that we can’t be doing it, moving towards that critical mass.”