ESG: A Report for Public Companies and the Implications for Private Companies

Green Finance Advisor of Friends of the Earth (HK)

Year to date 2021 has been a banner year for ESG investing where many would argue the coronavirus kicked off a sustained shift of flows and invest interest into ESG themed investments. Flows into ESG themed investment products has reached historic highs and performance of ESG related investments have also proven to outperform traditional investments, busting one of the biggest refrains investors had regarding ESG investing in which many believed ESG investing is only in name and does not produce material benefits in performance for investors. As of August 31, 2021, the MSCI World ESG Leaders index registered 19.8% in return versus the MSCI World index at 18.3%, an outperformance of 1.5% in absolute terms and 8.2% in relative terms. The P/E of the ESG Leaders index stands at 24.82 versus 23.87 for the traditional index, which is a 4% premium over the traditional index. Last but not least, the Sharpe ratio since Sep 28, 2007 is 0.48 for the ESG Leaders index versus 0.47 for the traditional index. These data point to the arrival of ESG investing in the public markets as a mainstream and no longer a wished for but seemingly unattainable reform of the capital markets. This should ensure those public companies who have a demonstrated better ESG implementation and compliance cheaper access to capital and in turn help them to grow more competitively compared to those with a poorer ESG record, which cumulatively should have an incremental impact in achieving ESG goals such as mitigating global warming (MSCI, 2021).

However, it is not enough if public companies are complying with the ESG requirements whilst private companies are not impacted, in fact as the trend in the past decade has been for companies to stay private for longer, enjoying a highly active private equity market and multiple rounds of fundraising, regulators would be amiss if they fail to encourage ESG compliance for private companies. Yet being unlisted companies without quarterly reporting burdens make enforcing ESG frameworks on private companies trickier. There are two ways with which ESG compliance can be enforced for private companies, (i) LPs demanding more disclosure and making ESG scrutiny part of the investment process, and (ii) through value chain relationships, such as a public company demanding a private supplier to provide ESG related disclosures so the public company can comply with its own ESG commitments, for example a public garment manufacturer may demand a private cotton supplier to supply the public company with ESG data, and make ESG compliance a supplier selection criteria. Broad examples of greenhouse gas emissions throughout the value chain can be seen in figure 1 below.

Figure 1. GHG Emissions Throughout the Value Chain

For enforcing compliance through LPs, the European Commission implemented sustainability-related disclosure requirements which were first announced in 2018 in March 2021. The requirements are targeted at asset managers and financial advisors for disclosures about what actions they are taking on sustainable investing topics. In the US, the SEC announced the creation of a climate and ESG task force in the Division of Enforcement to develop initiatives to proactively identify ESG-related misconduct, which will find and hold responsible those who make unsubstantiated claims (Wiek, 2021).

For enforcement through the value chain, the recent merger of Sustainability Accounting Standards Board (SASB) Foundation and the International Integrated Reporting Council (IIRC) to form the Value Reporting Foundation supports the SEC’s increased interest and initiative in the area of sustainability-related financial disclosures. The standards provide a consistent, comparable, and reliable sustainability information that is material to investment decision making, and has participation from 225 asset owners and asset managers representing approximately $72 trillion in assets under management from around the world (Cohen, 2021).

It is certainly encouraging that public markets adoption of ESG practices are now well accepted and established, however we as advocates for the environment should continue to push for full adoption in private markets in order to expedite to correct the trend in rising global temperatures, as we cannot lose more time in combating climate change, a monumental challenge that will take every incremental change to overcome.


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掌握ESG趨勢與投資, 建立ESG專業及未來 – 香港地球之友 x 香港大學專業進修學院ESG 課程

掌握ESG趨勢與投資, 建立ESG專業及未來

最新的ESG概念和發展是怎樣?
如何通過ESG增強企業韌性和競爭力?
如何將ESG分析應用於投資規劃中?
如何用可持續投資重塑未來?

首次與大專院校合作推出ESG持續進修課程 – 香港地球之友 x 香港大學專業進修學院

作為推動本港ESG教育的先行者,香港地球之友首次與香港大學專業進修學院合作推出ESG專業課程,通過一連五個星期的課程,學員可以從中認識ESG的概念與因素,了解ESG投資機遇與可持續發展投資市場及產品,研究企業在ESG方面的表現及洞悉其投資價值。

課程詳情如下:

課程制式 : 兼讀制
開課日期 : 2021年9月25日至10月23日(逢星期六)
教學語言 : 粵語
課程費用 : HKD 5100
修業期 : 5個星期
*本課程為「持續進修基金 CEF 認可課程」, 最高可退還上限 80%, 即$4,010 學費

課程詳情: https://bit.ly/3kwYFQo

查詢
綠色金融拓展團隊

電郵 : esg@foe.org.hk
電話 : (852) 3184 1510


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Biodiversity and Business

Alexandra Tracy, Green Finance Advisor of Friends of the Earth (HK)

Biodiversity is vital to most long term business survival.  Businesses need natural resources and ecosystem services as inputs into their production processes. They also depend on healthy ecosystems: networks of plants, animals and microbes which support life by dealing with waste, maintaining soil, air and water quality and much more.

Research by the World Economic Forum suggests that US$44 trillion of economic value generation – or more than half of the world’s total gross domestic product – is dependent on nature and natural ecoservices.

Negative business impacts on biodiversity

But businesses can have major negative impacts on biodiversity and natural habitats.  Direct effects are often connected with land use and waste generation, which can lead to habitat loss, land degradation and erosion or air, soil and water pollution.  Species loss may be compounded by the introduction of non-native species which can disrupt surrounding ecosystems.

The potential for damage to previously pristine areas in South East Asia is considerable.  Four of the world’s “biodiversity hotspots” are located in the region, which is home to many unique species.  In addition to the business itself, construction of associated infrastructure, such as roads and railways, can often harm or destroy the habitats of animals and plants in the area.  They may also make poaching and illegal resource extraction easier.

Moreover, the indirect impacts of a business on biodiversity may also be highly damaging, and are often most difficult to identify, manage and control.  For example, they may arise out of sourcing and production of goods and services associated with the company’s supply chain.  They might be caused by the use or disposal of the company’s products by partners or consumers.  Or they might come from changes in behaviour by employees or local communities which leads to problems such as unplanned migration or increased demand for natural resources.

A company’s failure to consider biodiversity and ecosystems could lead to disruption to supply of essential commodities, economic loss from floods or fires and even scarcity of food products.  As well as these practical problems, biodiversity loss can pose reputational, regulatory and financial risks to businesses.

How business can be part of the solution

Happily, businesses can learn to develop better relationships with biodiversity and healthy ecosystems.

The first step is to understand a company’s potential impacts on the environment, both directly and through its supply chain, and the potential opportunities to improve its performance.  These assessments may cover an analysis of the geographical localities – in particular, any biodiversity hotspots – that may be affected by the company’s operations, as well reviewing its upstream and downstream activities, including the extraction or production of the materials used in the business.

Using this analysis of biodiversity impacts, a business can define its priorities and set goals for improvements.  These may include targets for sustainable sourcing or promoting regenerative farming practices within the supply chain.  Some companies are also seeking to limit their land occupancy or to protect critical habitat around their operations, for example, by creating ecological corridors that allow for the movement of species.

Companies also can play an important role in protecting biodiversity by supporting external conservation efforts.  The United Nations Environment Programme estimates that investment in biodiversity, climate change and land restoration efforts (which currently stands at a little over US$130 per year) needs to triple in real terms by 2030 and increase four times by 2050 if the world is to meet its climate change, biodiversity and land degradation targets.  Currently, private finance makes up only 14 percent of the total investment, leaving enormous scope for business to do more.


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Upcoming Events on Green Finance/ 今期綠色金融活動一覽

Check out the above calendar for the fantastic green finance events for September! Interested to join and learn more about green finance? Browse the links below to check out the upcoming events on Green Finance.

以上一圖看清九月精彩的綠色金融活動!如欲參加及了解綠色金融相關的活動,歡迎瀏覽以下網址了解更多。

[1] PRI Academic Network Week

[2] 2021 ISS APAC Stewardship Briefing

[3] Unlocking capital for sustainability 2021: Scaling sustainable finance for a green recovery

[4] Net-Zero Now – Building Portfolios for a 1.5 Degrees World

[5] World Climate Forum ASIA: The Road to COP26 2021

[6] How ESG is Redefining Sustainable Investment


Visit www.foe.org.hk for more news about Friends of the Earth (HK)!
Green Finance Facebook page: https://www.facebook.com/greenfinancefoehk/
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綠色金融 Facebook 專頁: https://www.facebook.com/greenfinancefoehk/
香港地球之友 LinkedIn 專頁: https://www.linkedin.com/company/friends-of-the-earth-hk/

Final Call for IOSCO Consultation Submission – Deadline is Today!!

Green Finance Advisor of Friends of the Earth (HK)

The International Organization of Securities Commissions (IOSCO) is hosting a consultation on regulations of Environmental, Social & Governance (“ESG”) rating and data providers. It is proposing a set of recommendations to mitigate risks around ESG ratings and data products providers, including encouraging financial market practitioners to take international ESG ratings into account in their investment decisions.

As a pioneer in promoting green finance development in the Asia-Pacific region, Friends of the Earth (HK) organized a two-session webinar last week in English and Chinese, attended by representatives from listed companies, financial institutions and rating agencies, providing an overview of the report and putting forward suggestions to further advance and improve the quality and transparency of ESG ratings and data in order to meet the tightening regulatory requirements.

The key speaker of the webinar, Mr. Anthony Cheung, Board Governor and Green Finance Convenor of Friends of the Earth (HK), said, “This report is one of the most important consultation on ESG issues in recent years, with the objective to establish global sustainability disclosure standards that will be crucial for national jurisdictions to build upon as part of their mandatory reporting requirements. Enhancing the reliability, comparability and interpretability of ESG ratings and data products will help improve the quality and transparency of ESG disclosures.”

The Hong Kong Exchanges and Clearing Limited (HKEX) proposed the “ESG Reporting Guide”, requesting listed companies in Hong Kong to disclose ESG-related data on an annual basis, and subsequently tightened the disclosure requirements last year. These actions demonstrated the growing importance of ESG factors in the capital market. Even though listed companies have gradually started to disclose environmental data under regulatory requirements, the compliance level and quality for most of them are still far from satisfactory. We believe that with the increased adoption of international ESG ratings, the completeness and comparability of ESG data will be improved, and companies with better performance will have an advantage in their borrowing capacity.

Current ESG Data Could Lead to Potential Investment Risks

Over the past few years, as investors become increasingly focused on the potential financial risks posed by climate change and ESG considerations, ESG rating and data have become more significant in investment decision-making. The market for ESG ratings and data has grown exponentially and encouraged the development of new ESG ratings and data products.

Mr. Anthony Cheung said, “As these ratings and products are not within the consideration of many regulators currently, they may create potential risks to investor protection, market transparency and efficiency, risk pricing, as well as capital allocation. The IOSCO report revealed that there is a lack of clarity about the methodologies behind the ratings or data products and an uneven coverage of products across industries and countries. The lack of data and standards presents a risk on ’greenwashing’ or misallocation of assets and could lead to a lack of trust in ESG ratings or in the robustness of relevant data products.”

Enhancing the Reliability of ESG Data and ESG Rating is Imperative

In view of this, IOSCO proposed a series of recommendations in its report; highlights as follows:

Recommendation for IOSCO members

• Regulating ESG ratings and data products providers to build confidence, improve take-up, and protect investors

• Considering the level of overlap in processes for determining ESG ratings and data products with the processes for determining credit ratings and mitigate potential conflicts of interest

Recommendations for ESG ratings and data products providers

• Issuing high quality products using publicly disclosed data sources with transparent and defined methodologies

• Ensuring decisions are made independently and free of conflicts of interest

• Making high levels of public disclosure and transparency an objective

• Maintaining all private information pertaining to ESG ratings and data products in confidence

Recommendation for ESG Ratings and Data Products Users

• Conducting due diligence on ESG ratings and data products to gain an understanding of the assessment methodologies and their limitations

Friends of the Earth (HK) encourages practitioners in the Asia-pacific region to submit their opinion by today to help regulators set policy directions for moving forward with a sustainable society and economy.


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