Continuous support from the authority to pave the way for ESG developments

Green Finance Advisor of Friends of the Earth (HK)

Despite the previous discussion over the quality of ESG disclosures of corporate which might have unveiled the inadequacy in monitoring and auditing in Hong Kong, the recent regulatory developments on the regulatory front are expected to propel the overall ESG awareness in the financial markets.

Further to the launch of STAGE by the HKEX mentioned in the previous post, starting from 1 July, the amendments to the Listing Rules and the ESG Guide related to the ESG Disclosure Review proposed by the Stock Exchange of Hong Kong Limited (SEHK) would take effect, and companies are now required to publish their ESG report within five months after the end of the financial years.

Under the new reporting regime, certain ESG disclosures would become compulsory, with other disclosures elevated from “recommended” to being required on a “comply or explain” basis, in particular to the KPI disclosures on the social aspects. It implies that if a company decides not to disclose a KPI on the social aspect as it does not impact business operations, the company has to provide further explanation. This revision reflects that the SEHK expects corporates to develop an outright focus on each of the aspects of ESG, no matter whether it is significant to their operations.

The revamp also comes along with an enhanced focus on the environmental aspect. Companies are now required to report policies related to the identification and mitigation solutions of critical climate issues affecting the business. Meanwhile, as the disclosure of environmental targets, such as water efficiency targets and emissions target, are covered as part of the environmental KPIs, companies also need to report their targets and the plans to achieve them.

Last but not least, the authority advocates the board’s oversight of ESG issues in the amendments. As part of the disclosure, companies need to highlight the board’s oversight of ESG management strategy and approach, including the establishment of a dedicated workgroup looking after ESG issues, its scope of duties and allocation of resources.

Although Hong Kong is generally regarded as a laggard in terms of ESG developments, the authority’s efforts to promote ESG awareness and improve the governance is well-received. We shall wish the efforts will pay off in the near future and the industry can be making headway!

Asia Sustainable Finance Events, Webinars & Reports: July 2020

Idea Exchange – James Robertson

Events & Webinars

  • Webinar: Insurance Sustainability Development Goals (iSDGs)
    Organised by: Swiss Re and UN Environment Programme’s Principles for Sustainable Insurance Initiative (PSI)
    Date & Time: 8th July 7 – 9pm HKT

    Currently, many insurance products and solutions already support achieving the SDGs but the industry lacks a systematic mapping of such products and solutions, a clear narrative, and methods to measure impact. There is also a lack of understanding on the types of insurance products and solutions needed—both existing and new—to support the achievement of various SDGs, and how such products and solutions can be developed and brought to scale. Finally, there are no global goals or targets for the insurance industry linking its insurance portfolios to the SDGs.

    For this third event, there will be three sessions on how insurance products and solutions can contribute to achieving the SDGs. Specifically, speakers will discuss an agenda-setting PSI collaborative initiative to develop “Insurance SDGs”, including how non-life and life & health insurance can support the SDGs, and emerging SDG opportunities for the insurance industry.

    This event is part of the PSI-Swiss Re online event series 2020 on “Sustainability leadership in insurance“.

Reports & Research

  • Book: ESG Investment – Opportunities and Risks for Asia (Free to download)
    Published by: Asian Development Bank (ADB) Institute

    ESG investment has the potential to bridge the gap between traditional capitalism and the newer concepts of shared economic and social value and sustainable and inclusive finance. It can also act as a driver for incentivizing the private sector to tackle environmental and social challenges, such as those related to renewable energy, employee training and education, and the gender gap. These benefits can in turn help to boost corporate value and economic growth.

    However, concerns remain on many issues, such as unclear and dispersed criteria for sustainable investment, the low quality of non-financial data, lack of disclosure, and resource misallocation risks. These obstacles are critical for many countries in Asia and the Pacific whose stages of development have not yet reached those of more developed countries.

    This timely book investigates the current state of ESG investment and examines the risks and benefits using an evidence-based approach. It aims to contribute to developing a framework for future analysis and monitoring to ensure the growth of ESG investment while exploring innovative ways for economies in Asia to leverage the benefits for sound and sustainable development.
  • New Report: Investing with SDG outcomes: A five-part framework
    Published by: PRI

    Following on from the PRI’s The SDG investment case – which laid out why the SDGs are relevant to investors, why there is an expectation that investors will contribute and why investors should want to – this report takes the next steps by outlining a prospective framework for action. It is meant as a useful reference for all PRI signatories, providing sufficient scope for asset owners, investment managers and service providers to differ in the specific actions they undertake to shape outcomes in line with the SDGs.

    This framework is the starting point for a deeper and ongoing body of work on the subject, and will be the basis for future guidance and support.
  • New Research: Sustainable and actionable: An ESG study of climate and social challenge for Asia
    Published by: Economist Intelligence Unit

    Sustainable and actionable: An ESG study of climate and social challenge for Asia is an Economist Intelligence Unit report, commissioned by Amundi. It explores environmental, social and governance (ESG) investing in fixed-income markets and examines the evolution of “green” debt from an issuer, investor and regulatory perspective. Central to the study is a question about market progress and if it has been enough, in Paris Agreement terms.

    The research is based on in-depth interviews conducted with 14 executives at asset-owner firms, regulatory bodies and finance professionals at academic or advisory organisations alongside extensive desk research and historical analysis. While the study concentrates on stakeholders and market players in Asia, the conclusions and implications are globally minded.
  • New Report: Towards a Better Hong Kong – Pathways to Net Zero Carbon Emissions by 2050
    Published by: World Resources Institute and Civic Exchange

    Hong Kong is developing its own long-term decarbonisation strategy. The government kicked off a public engagement in June 2019 to collect public views; it is expected to announce the results later this year. It will subsequently formulate a long-term decarbonisation strategy.

    This report analyses the feasibility of Hong Kong’s reaching a net zero emission target in 2050 and provide inputs for the formulation of Hong Kong’s long-term decarbonisation strategy. It highlights where action is needed through 2050 and provides context for landmark decisions that must be made under current policy plans until 2030. This project involved a detailed modelling exercise that perspectives.

    The model evaluated the medium and long-term impacts on CO2 emissions in Hong Kong of key policies for the power, building and mobility sectors and devised additional policy recommendations to strengthen the pathway towards net zero emissions.
  • New Report: Climate Change Impact on Sovereign Ratings: A Primer
    Published by: Fitch Ratings

    An Undoubted Risk, but Hard to Quantify Fitch Ratings aims to capture climate change in sovereign ratings, as it does for all factors that it believes are relevant and material for creditworthiness. However, the magnitude and timing of the impact on individual sovereigns is highly uncertain.

    Some impact is already visible and reflected in ratings, but a comprehensive assessment of future risks would require further information, analysis or assumptions on issues including: future international policy actions on greenhouse gas (GHG) emissions and the effect of the resulting atmospheric stock of GHGs on global temperatures; the sovereign exposure to country-specific rises in temperature, drought, sea levels, extreme weather and natural disasters; the constraints on exploitation of fossil fuels; and the likely effectiveness of mitigation and adaption strategies. It would also require assessment of the impact of these climate and policy developments on variables that directly affect sovereign creditworthiness, such as GDP, public finances and political risk; as well as judgments on relevant time and rating horizons.

    Climate Change Risk Factors for Sovereigns Physical risks include the potential impact of higher temperatures, drought, rising sea levels, change in land use and more extreme weather events and incidences of natural disasters. Transition risks include exposure to potentially ‘stranded assets’ (such as fossil fuel resources that may never be used) owing to changes in global policies, technology or consumer preferences.
  • New Report: China Green Bond Market 2019 Research Report
    Published by: Climate Bonds Initiative

    The report analyses the key developments in the world’s largest source of labelled green bonds. Focusing on green bond issuance, policy development and wider market growth, available in English and Chinese, the report is the fourth in an annual series from Climate Bonds.

    Climate Bonds Initiative completed this research report in collaboration with the China Central Depository Clearing Co. Ltd Research Centre (CCDC Research) and with the support of HSBC.
  • New Research: Should COVID-19 bailouts include ESG performance metrics? An Australian case study
    Published by: ISS ESG

    The monetary value of government bailouts as a response to COVID-19 is unprecedented. Whilst governments historically have justified disaster-related bailouts to companies based on securing employment, there is now a growing focus on linking receipt of public funds to addressing wider ESG-related matters, such as tax transparency and quantifiable climate targets. This paper explores several of these initiatives using an Australian case study.
  • New Working Paper: Will COVID-19 fiscal recovery packages accelerate or retard progress on climate change?
    Published by: Smith School of Enterprise and the Environment, University of Oxford

    The COVID-19 crisis is likely to have dramatic consequences for progress on climate change. Imminent fiscal recovery packages could entrench or partly displace the current fossil-fuel-intensive economic system. Here, we survey 231 central bank officials, finance ministry officials, and other economic experts from G20 countries on the relative performance of 25 major fiscal recovery archetypes across four dimensions: speed of implementation, economic multiplier, climate impact potential, and overall desirability.

    We identify five policies with high potential on both economic multiplier and climate impact metrics: clean physical infrastructure, building efficiency retrofits, investment in education and training, natural capital investment, and clean R&D. In lower- and middle-income countries (LMICs) rural support spending is of particular value while clean R&D is less important. These recommendations are contextualised through analysis of the short-run impacts of COVID-19 on greenhouse gas curtailment and plausible medium-run shifts in the habits and behaviours of humans and institutions.
  • New Working Paper: The Effect of Firm-level ESG Practices on Macroeconomic Performance
    Published by: Oxford Sustainable Finance Programme, Smith School of Enterprise and the Environment, University of Oxford

    This working paper investigates whether the development and adoption of firm-level environmental, social and governance (ESG) practices affects national macroeconomic performance, and whether this differs between developed countries and emerging economies. Using dynamic panel techniques – generalised method-of-moments (GMM) estimators – we find that an increase of micro-ESG performance can result in the improvement of living standards as measured by GDP per capita. When we test this link by country type, we find that firm-level social performance in a country is positively associated with GDP per capita in both developed countries and emerging economies.

    As for the other two components of firm-level ESG measures, namely environmental and governance performance, we find that these affect macroeconomic performance in emerging economies, but that the effects remain insignificant in developed countries. While further research is needed, these results may be of particular interest to policymakers and central banks, as they suggest that encouraging the adoption of ESG practices at the firm-level could support macroeconomic performance.
  • New Report: Building a Global ESG Disclosure Framework: a Path Forward
    Published by: Institute of International Finance

    The focus of this paper is on entity-level disclosures of ESG-relevant information by financial institutions. In this context, this paper also addresses non-financial reporting by other corporates, given the interlinkage between robust corporate ESG disclosure and financial institutions’ own ESG disclosures and risk management. We consider disclosures that are corporate in nature (e.g. to inform investment and financing decisions) and those that are more regulatory/supervisory in nature. Such disclosures are often also referred to as nonfinancial reporting.

    This paper reviews the spectrum of existing ESG disclosure frameworks and standards, ranging from voluntary frameworks (which many firms are, or feel, obliged to complete due to their stakeholders’ expectations and requirements) to national and regional policy and regulatory requirements, which come in various forms and involve different compliance mechanisms.

    Although climate-related disclosures have been a key issue in recent years, not least due to the impact of the TCFD (and general awareness of and focus on climate-related risks within financial policymaking and regulation), this paper focuses on ESG disclosures more broadly to identify where consistency and fragmentation issues may arise.
  • New Report: Understanding Physical Climate Risks and Opportunities
    Published by: IIGCC

    As the severity of climate change grows, the urgency for investors to address physical risks in their portfolios becomes more acute. IIGCC has therefore produced guidance for investors which sets out how they can integrate the risks and opportunities presented by the physical impacts of climate change into their investment processes.

    The report provides comprehensive and practically focused full guidance on the topic. This is then supplemented by a shorter form practical summary guidance of steps for investors to take, which complements the core guidance report.

    The detailed guidance is intended as a useful tool for investors which brings together useful case studies, frameworks and resources for investors who are making a start on assessing physical risk. Critical considerations and questions are provided at each stage of a generalised climate risk assessment process, which enables investors to shape physical climate risk and opportunity analysis that is relevant to their individual context.

    Also see the press release here for more info and context to the guidance.

Issuance of Social bonds and STAGE / 社會責任債券和可持續及綠色交易所 (STAGE)

Green Finance Advisor of Friends of the Earth (HK) / 香港地球之友綠色金融顧問

The outbreak of COVID-19 is affecting countries, big and small, around the world. Governments and organisations are stepping up support for people and businesses. This gives rise to the popularity of issuance of social bonds, which are used to finance projects that having positive social influence. Paying for healthcare system, providing subsidies for SME/employment and building affordable homes are project examples.

In March 2020, the International Capital Markets Association (ICMA) highlighted the role of social bonds in helping the fight of coronavirus pandemic. According to data shared by Morgan Stanley, about US$32 billion of social bonds have been issued in April 2020 alone, exceeding the issuance of green bonds for the first time. Some of the issuers include European Investment Bank, Cassa depositi e prestiti and Bpifrance. Both social bonds and green bonds are under the umbrella of sustainable bonds.

We recommend the HKSAR government to issue social bonds in response to COVID-19. This will not only give more financial support to the Hong Kong people but also help promote Hong Kong’s strengths and thought leadership on green and sustainable finance regionally and globally. This is among the things that the Green and Sustainable Finance Cross-Agency Steering Group (established last month, initiated by HKMA and SFC) wants to achieve. Noticeably, the HK Exchange recently announced the launch of Sustainable and Green Exchange – STAGE. An online repository for sustainability, green and social bonds and ESG-related Exchange Traded is expected to roll out later this year as part of the initial phase of STAGE. COVID-19 social bonds could be put into this repository.

More about the STAGE (https://sc.hkex.com.hk/TuniS/www.hkex.com.hk/news/news-release/2020/200618news?sc_lang=zh-cn.)

COVID-19的爆發正在影響世界各地的大小國家。各地政府和機構正在加大對人民和企業的支持。這引起了社會責任債券發行的普及,這些債券用於為具有積極社會影響力的項目提供資金。支付醫療保健系統費用,發放中小企業務補貼/就業補貼和建造負擔得起的房屋就是項目的例子。

2020年3月,國際資本市場協會(ICMA)強調了社會責任債券在幫助抗擊新冠病毒大流行中的作用。根據摩根士丹利(Morgan Stanley)的報告,僅在2020年4月全球已發行了約320億美元的社會責任債券,首次超過了綠色債券的發行量。其中一些發行人包括歐洲投資銀行、意大利國有銀行和法國國家投資銀行。社會責任債券和綠色債券都屬於可持續債券的範疇。

我們建議香港特區政府針對COVID-19發行社會責任債券。這不僅將為香港人提供更多的財政支持,而且還將有助於在區域和全球範圍內增強香港在綠色和可持續金融方面的實力和思想領導力。這是由金管局和證監會在上月共同發起成立的綠色和可持續金融跨機構督導小組希望實現的目標之一。值得一提的是,香港交易所最近宣布啟動可持續及綠色交易所。作為STAGE初始階段的一部分,有望在今年晚些時候推出有關可持續性、綠色和社會責任債券以及與ESG相關的交易所交易的線上儲存庫。COVID-19社會責任債券可以放入此儲存庫中。

有關STAGE的更多資訊 (https://www.hkex.com.hk/News/News-Release/2020/200618news?sc_lang=zh-HK)

Image source 圖片來源: Scaling Impact

但願牛隻不會放屁

香港地球之友綠色金融顧問

筆者過往曾多次提出,ESG標準及報告指引出問題,ESG報告顧問水平出問題,ESG審核沒能力形成標準化的問題,結果ESG報告,甚至ESG評分機構,也不可能得出有意義結果,今天,筆者想給大家一個強而有力的例子。

筆者手頭上有一位上市公司客戶,持有上海一所中小型酒店,以及國內一些房地產,過去數年的ESG報告都相對簡單,但在去年,這個客戶在南美收購了一個農場及一個牧場,農場種稻米及玉米,牧場則養了一千五百頭牛,部份是肉牛,而部分是乳牛。手頭客戶中,這是第一個涉及養牛,當然難掩興奮,因為第一次有機會計算牲畜的直接溫室排放。

經資料搜集及計算後,發覺這家公司牛隻的溫室氣體排放,約佔整家公司的33%,一向以來,我們接觸的新聞訊息,都不斷指出牛隻的溫室排放極嚴重,所以這結果亦符合筆者的內心估計。以這家公司的數字看來,如果是純乳牛公司,牛隻的溫室氣體排放可能會達公司總排放的百分之70以上。在好奇心驅使下,筆者立刻翻查在香港上市的所有乳牛公司,看看他們的驚人排放數字,但結果可能會讓大家大吃一驚,驚的不是驚人數字,而是根本沒有計算。

港交所2016年開始強制所有上市公司披露ESG報告,而報告指引中當然包括所有溫室氣體排放,但指引內容只教了燃料使用的氣體排放計算方法,沒有提過牧業,所以香港的上市牧業公司,全部都有披露他們使用的煤量與電量,但沒有一家披露動物本身的溫室氣體排放。好奇心再驅使下,筆者再查看香港上市的養豬公司,結果也是一樣。即是這類公司全少報了一大半的溫室氣體,而這類公司排放量動輒以十萬噸計,這個少報數字的驚人程度,可以想像。

好了,大家看到這裏,你們認為是港交所指引的不專業,還是這些公司聘請的顧問公司不專業?以筆者的經驗,當然看到當中有不少是四大的「作品」,還有一些是經過第三方國際機構審核!筆者深深相信,一般環保人士,雖然未必了解ESG報告,但對牛隻的溫室排放,卻是123的小學水平,大家不但理解,還已經關注多年,但問題究竟出在哪裏?其實問題很簡單,一個理應嚴謹的報告,由不專業的人訂定規則,不專業亦不認真的人執法,不專的人做顧問搶佔市場,不專業的所謂審核機構進行審核,到報告出街時,不專業的政策執行者視而不見或無力執行,或根本沒有誠意執行,就會得出這樣的結果了。

大家試想像,如果上市公司財務報表少報一大半收支,結果會是如何?

The Growth of ESG Integration

Michele Leung, Green Finance Advisor of Friends of the Earth (HK)

According to Global Sustainable Investment Review, USD $32 trillion of assets are professionally managed under sustainable responsible investment strategies in 2018[1]. It represented a compounding annual growth rate of 43% over the past 12 years. As more institutional investors are integrating ESG into their portfolios, studies have been done on the leading factors for such trend.

Undeniably regulation is one of the main drivers. For example, EU has introduced the “EU Climate Transition Benchmark” and “EU Paris-Aligned Benchmark”, which aimed at reallocating capital towards a low-carbon and climate resilient economy. Domestically, we are also seeing stricter disclosure requirement enforced by various exchanges. Fiduciary duty is a primary driver for asset owners, particularly for the pension funds and endowments that have to respond to their stakeholders. Risk management is also an important aspect as ESG is considered to have some downside protection nature, from mitigating ESG risk to avoiding reputation risk.

Surprisingly, generating outperformance doesn’t yet to be considered as a key factor for ESG adoption. Despite the ongoing skeptics, more researches have been done to establish the financial relevancy. For example, in one industry study (link), it looked at the correlation between ESG and market performance, which found ESG integration generally demonstrated historically higher active return profiles in Emerging Market and Asian equities. 

ESG funds are also gaining traction under current situation. As of Jun 1, 2020, iShares ESG MSCI USA Leaders (SUSL) outperformed S&P 500 year-to-date by 176 bps, the underlying benchmark was based on best-in-class approach which targets the companies that have the highest ESG rated performance in each sector of the parent index. In the meanwhile, COVID-19 has underscored the importance of ESG issues to company resilience and long-term performance. Social and Governance issues are at the forefront with spotlights on labor practices, employee health and safety and supply chain management.

Overall, it is encouraging to see ESG integration is on the rise with more investors bringing ESG into their investment decisions and achieve sustainable value creation.

[1] Source: https://sdg.iisd.org/news/gsia-report-finds-increase-in-sustainable-investing/