美國行政命令下的Governance

香港地球之友綠色金融顧問 黃思靈

寫這篇網誌時,市場還正因為美國總統特朗普簽署的行政命令而煩擾中。該行政命令禁止美國資金投資35間由中國解放軍擁有或控制的中國企業及相關的子公司,以及包含這些公司的衍生產品諸如ETF,1月11日起生效。

其實在ESG層面,也有採用負面篩選的策略以避免投資於可能對社會造成傷害的企業,比如經營煙草、賭博或軍工的公司。如果這個美國行政命令提出所謂制裁與軍事活動相關的中國企業乃有實際證明的話,此措施可能可被視為ESG Investing;只是目前看來比較像中美政治對弈下的一種行為。在沒有根據的情況下,禁止投資部份中國企業,違反了應有的投資原則,甚至破壞市場秩序,筆者實在不明白這算什麼Governance。一直以來,國際投資者對踏入中國市場沒信心,主要憂慮便是說不準的監管風險,但似乎美國作為已發展的堂堂大國,在Governance方面也不遑多讓。

由於這次實屬監管政策,無法不遵循,筆者只能為美國廣大投資者感無奈。看到不少美資機構,為了滿足監管規範,被迫沽出那些被點名的中國公司之投資、或不再增持,外國的指數公司亦陸續把此等中國企業踢出指數.. 大家都因為美國的行政命令,背棄了本來的投資目的。Governance在這個情況下維護不了,始終誰大誰惡誰正確,世界要真正達到ESG,仍然前路漫漫呢。


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Dear Corporate Issuers, Are You Prepared?

Green Finance Advisor of Friends of the Earth (HK)

There is an increasing number of corporates proactively talked about the key words like “sustainability”, “carbon emission”, “environmental”, “diversity”, and they are concerned how they perform regarding their ESG data and ratings. Not only because there are more evidences on ESG financially relevancy, i.e. companies with high ESG ratings had on average higher profitability and lower tail risk, but also more investors continue to integrate ESG considerations into their investment process.

While there is a significant improvement in general ESG disclosure and awareness, the demand for more ESG disclosure is likely to rise as new regulations are taking effect and voluntary reporting standards are becoming mandatory in some countries. For example, the Task Force on Climate-related Financial Disclosures (TCFD) reporting became mandatory for UNPRI signatories in 2020. Locally in Hong Kong, SFC recently issued a Consultation Paper that proposed amendments to the Fund Manager Code of Conduct (FMCC) addressing climate-related risk and it referred to the Recommendations of the TCFD to foster a “more consistent disclosure framework and minimize the industry’s compliance burden”.

In Europe, there is Sustainable Finance Disclosure Regulation (SFDR), which proposes the investment institutions to report on their portfolio companies on extensive ESG datapoints and could be as early as March 2021. In addition to the obvious and widely reported ones like carbon emission, board gender diversity, anti-corruption and anti-bribery policies, the other required data are gender pay gap, excessive CEO pay ratio, water emissions, deforestation etc. Some of these data points may require alternative data or proxy as those risks maybe unexplored or emerge at the macro level that need information external to the corporates.

These reporting requirements are putting a lot of pressure on the investors and they will certainly reach out to the corporates soon for these disclosure gaps. Many corporates have set up their sustainability departments and working groups with involvements from their finance, legal, investor relations and even C-suite executives. Some of them are also working closely with corporate advisors and data providers to help them with the reporting requirements. Dear corporate issuers, are you prepared?


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ESG INVESTING – A BRIEF 2020 REVIEW AND OUTLOOK

Green Finance Advisor of Friends of the Earth (HK)

Many will look back on 2020 with mixed feelings, having been a very abnormal year with back-to-back disruptions from social unrest followed immediately by Covid-19 in Hong Kong. Not only have we been forced to adopt new ways of going about our daily lives, but these new ways of living may also even become standard practice in the new normal of living under heightened awareness of the threat of another future pandemic unfolding, and to say this past year has been an aberration in the continued progress of development of the human civilization would be an understatement.

However, interruptions often act as a springboard toward greater innovation to leapfrog the archaic modus operandi that society has so often become too comfortable with. Just as the bubonic plague in medieval Europe laid the seeds for the European Renaissance two centuries later which established the European golden age, Covid-19 may be the catalyst that springboards ESG investing in a paradigm shift to become the new normal.

In review of 2020, ESG investing indeed gained steam, where in the US ESG equity funds have experienced larger inflows during 2020 at +$28 billion than in the previous five years combined at +$25 billion. The AUM of ESG focused funds increased from $260 billion at the beginning of 2020 to $310 billion, whereas all other equity funds including active, passive, and ETFs experienced an outflow of $270 billion year-to-date in 2020. ESG funds also outperformed the S&P500 with the average ESG-focused fund returning 13.5% YTD vs. 11.6% for the S&P500. (Kostin, D.J., Snider, B., Menon, A., Hammond, R., Hunter, C., Conners, Cormac., and Calcagnini., Lily., 2020).

Between 2012 and 2019, investors generally assigned a valuation discount to Environment and Social E&S scores, although this discount became smaller and is now even at a slight premium as a result of rising ESG-focused fund inflows. However,

this valuation premium remains statistically insignificant as compared to fundamental metrics such as long-term growth prospects and balance sheet strength. Indeed, with the incoming Biden administration, whose key initiatives include renewable energy and climate-related spending, the trend towards ESG adoption is set to further strengthen.

Good news aside, there remain many challenges in measuring ESG, namely the fact that the definition of ESG itself is extremely broad and ambiguous, making it difficult to assign a single rating to a company or compare sustainability across industries and sectors; and while the volume of ESG data has spiked, the quality of the data remains ambivalent. Policy intentions rather than quantifiable metrics continue to dominate the majority of available information and disclosures across companies lack uniformity. While the availability of numeric metrics has risen in the past few years, they still comprise only 25% of the criteria used in most ESG analysis. (Kostin, D.J., Snider, B., Menon, A., Hammond, R., Hunter, C., Conners, Cormac., and Calcagnini., Lily., 2020).

In a recent report on ESG Investing published by the Organization for Economic Cooperation and Development, the authors also highlighted the challenges of current market practices where the bewildering ratings, investment terminology and individual metrics present a fragmented and inconsistent view of ESG risks and performances. Some of the key difficulties in the full adoption of ESG investing include lack of standardization of the data that is disclosed or collected, as well as the difference in methodologies adopted by different providers in their respective calculations of ESG scoring.

The OECD teams suggests the following five key areas to improve usability and adoption of ESG into investment evaluation:

1. Ensuring consistency, comparability and quality of core metrics in reporting frameworks for ESG disclosure.

2. Ensuring relevance of reporting through financial materiality over the medium and long-term.

3. Levelling the playing field between large and small issuers related to ESG disclosure and ratings.

4. Promoting the transparency and comparability of scoring and weighting methodologies of established ESG ratings providers and indices.

5. Appropriate labelling and disclosure of ESG products to adequately inform investors of how ESG is used in the investment process and asset selection.

(Boffo, R., and Patalano, R., 2020)

While 2020 may not have been a year to remember, there are certainly things to be thankful for, and the increasing trend of ESG adoption is certainly one of them. Let us hope that it doesn’t take another drastic global event such as the Covid-19 pandemic to act as a catalyst for ESG adoption, but that the momentum we witnessed in 2020 will be sustained and full ESG integration will not be a thing of the too distant future.

BIBLIOGRAPHY

· Boffo, R., and R. Patalano (2020), “ESG Investing: Practices, Progress and Challenges”, OECD Paris, www.oecd.org/finance/ESG-Investing-Practices-Progress-and-Challenges.pdf

· Kostin, D.J., Snider, B., Menon, A., Hammond, R., Hunter, C., Conners, Cormac., and Calcagnini., Lily., (2020), “2021 US Equity Outlook: Roaring ‘20s Redux”, Goldman Sachs Global International Research


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Natural capital is underpriced/ 自然資本被低估

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

The Green and Sustainable Finance Cross-Agency Steering Group of Hong Kong recently announced its green and sustainable finance strategy. This is an important step for nurturing Hong Kong to become a green finance hub. One of the five near-term action points of the plan is making climate-related disclosure mandatory for banks and asset managers by 2025. With better information on climate-rated risks capital (hopefully) will act more responsibly and direct to companies and activities that are more friendly to our environment. 

Understanding climate risk is important but building a sustainable world we need to have assessment of other aspects outside of climate. We need assessment of natural capital – the world’s natural resources including water, air, soil and living things. It is these assets that enable us to survive and thrive yet we are obviously not preserving them as good as we should. Why? Because we are spoiled and these assets are underpriced in the world of finance. 

Let’s take water for example. Ones may argue that water is not free as households and companies are paying for water bills. However, many of these water bills are just based on the cost of transmission and treatment of water. No or very limited value is attributed to water itself. This applies to many other types of natural capital. Among all living things (other than human) in the natural environment are what we see as the most neglected. Should there be methods of estimating natural capital costs and linking those to specific economic activities in our financial system? A proper accounting of the economic value of natural capital seems needed to accelerate our path of sustainability. 

We need to treasure and save our natural capital to speed up the sustainable development of the world. 

香港政府綠色與可持續金融跨機構督導小組,最近宣布了其綠色與可持續金融的策略計劃及其五個主要行動綱領。這是培育香港成為綠色金融中心的重要一步。該五個短期行動綱領之一為要求相關金融行業必須在2025年或之前按照氣候相關財務披露工作小組(Task Force on Climate-related Financial Disclosures)的建議,就氣候相關資料作出披露。有了有關更多氣候風險的披露,希望資金能投入綠色和可持續發展的業務,令我們的環境變得更好。 

了解氣候風險很重要,但是要建立一個可持續發展的世界,我們需要對氣候以外的其他方面進行評估。我們需要評估自然資產,  包括水,空氣,土壤和生物等自然資源。正是這些資產使我們得以生存和發展,但顯然我們並未盡所能保存它們。為什麼?因為我們被寵壞了,這些資產在金融世界中被低估了。 

讓我們以水為例。有人可能會爭辯說,水不是免費的,因為家庭和公司都在支付水費單。但是,這些水費賬單很多時候只是基於水的輸送和處理成本。可以說非常有限的價值歸因於水本身。許多其他類型的自然資本也面對同樣的現實。在自然資本中,除人類以外的所有生物的價值最被忽視。是否應該有估算自然資本成本並將其與我們的金融體系中特定經濟活動聯繫起來的方法? 

似乎我們需要對自然資本的經濟價值進行適當的核算,以加快世界在可持續發展道路上的步伐。 

Reference 資料來源:

Cross-Agency Steering Group Launches its Strategic Plan to Strengthen Hong Kong’s Financial Ecosystem to Support a Greener and More Sustainable Future (17 Dec 2020)  

Recognizing the value of natural capital by Lombard Odier (10 Dec 2020) 

Clear and practical guides to natural capital management published by ACCA (26 Nov 2020) 


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BONDS: How far we are to be the Global Green Bond Hub

Mostafa Monira Firdouse, Green Finance Advisor of Friends of the Earth (HK)

As I am writing this article in late 2020, the world is fighting with COVID-19 Pandemic, Europe and USA remain gripped in health system in living memory. Sure, we will bounce back. Jingle bells ringing and VACCINE is on the way.

The pandemic is driving a boom in investments to fix the climate crisis pandemic has created. It seems, the arrow is in flight. The value of green bonds issued in the first nine months of 2020 surged 12% over the previous year to more than $200 billion, according to research company BloombergNEF. Though, there are questions and concerns on whether the green bonds are more about marketing than helping the environment and we cannot ignore the greenwashing issue. However, I believe, at this moment, we need to think about capturing the momentum and carefully move forward to develop more transparent ESG reporting and to strengthen city’s status as an international financial centre.

Can Hong Kong play the role of next 007, in international green bond market?

As we know, Bond Connect played an active part in the development and liberalisation of Mainland bond market. The launch of Bond Connect by the HKMA and the People’s Bank of China in 2017 accelerated and deepened the open-up process. It’s accounted for 52% of foreign investors’ total turnover in the Mainland interbank bond market in the first eight months of 2020 through Hong Kong financial infrastructure. Which establishing Hong Kong’s position to become a green bond financing hub for the Greater Bay Area.

However, according to the Green Bond Survey report by Hong Kong Academy of Finance, it showed; potential issuers and potential investors alike rate having external reviews and improved quality of ESG information disclosure as key factors that make green bonds issued in Hong Kong more attractive. From the think-tank’s point of view, which should be an immediate priority to take immediate action by HKMA and participatory financial institutions.


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