Green Criminology

Green Finance Advisor of Friends of the Earth (HK)

Green criminology applies a broad “green” perspective to environmental harms, ecological justice, and the study of environmental laws and criminality, which includes crimes affecting the environment and non-human nature. Discussions on Green criminology often center on pollution, animal cruelty, deforestation, crimes that are committed directly against the environment or acts that cause harm to the environment (M J Lynch (1990)), but there have not been a lot of discussions centering on the prevention of green crimes and the tools to curtail the same. This article intends to outline the macro initiatives and ways to prevent green crimes at a preliminary phase.

• Identify risk in supply chains and to promote sustainable investment decisions

With a view to reduce and deter green crime, it is important to identify risks associated with green crime in supply chains. The private sector can also play an invaluable role in actively promoting sustainable development. To achieve this, each individual organization must strive to make long-term decisions that drive positive change. On an organizational level, every individual compliance team has a part to play in identifying and exposing financial crime. Best practice convinces us that financial crime screening and related due diligence remain our best defense against corruption, but these essential operational tools also have an important social element that warrants consideration. Moreover, organizations could also strive to implement macro initiatives to curtail illegal activity pertaining to environmental crime, including UN’s 17 Sustainable Development Goals. Those goals outlined by the UN function as a guideline or blueprint to achieve a better and more sustainable future for all” and seek to identify global challenges including those related to poverty, inequality, climate and environmental, oceanic, degradation.

• ESG Due Diligence

In view of the above, ESG due diligence plays an important role forming investment decisions. If an ESG due diligence is not made before the transaction, there is also a risk that criminal acts continue in the new organization as they had previously, i.e. if, for example, no corruption risk has been identified in the target before the transaction and the company does not have adequate procedures to deal with such risk, there is a possibility of also being in breach of corruption legislation after the company has been taken over.

Using the right tools can help organizations to make better investment decisions and build sustainability into their investment and business strategies. Investment decisions could be assessed on the organization’s performance in critical areas such as climate change, diversity, business ethics and corporate governance. Collectively, those are effective ways inpreventing and deterring green crimes at the initial stage.


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Global Survey of the Insurance Industry on Environment Liability and Sustainable Insurance

Dylan Bryant, Green Insurance Working Group Co-chair, Hong Kong Green Finance Association

Anthony Cheung, Convenor of Green Finance, Friends of the Earth (HK)

Dear Friends,

First of all, we would like to convey our best wishes for 2021! We look forward to continuing working with you and moving the green finance agenda forward.

We are pleased to kick off the year by sharing with you a global survey of the insurance industry on environment liability and sustainable insurance.

PSI Grounding Paper on environmental liability and sustainable insurance

In June 2020, the Principles for Sustainable Insurance (PSI) launched the first-ever insurance industry guide to manage environmental, social and governance (ESG) risks—or sustainability risks. The guide shows how insurers can develop a systematic approach to managing ESG risks such as climate change, environmental degradation, protected sites and species, animal welfare, human rights, controversial weapons, and corruption.

Despite the pioneering nature of the insurance industry sustainability guide on ESG risks, it does not specifically address environmental liability risks. Furthermore, the insurance industry is a major investor, with global assets under management of more than USD 30 trillion. Therefore, it is equally important to understand environmental liability risks in the context of insurers as institutional investors.

In this regard, the PSI is carrying out a project focused on the potential to mobilize the insurance industry’s role as a risk manager, insurer and investor specifically regarding environmental liability insurance.

Global Survey

In this regard, we are inviting you to complete an online survey by 31 January 2021. The survey is an excellent opportunity to share your views on this topic, and perhaps gain new insights as well. If you would like to participate in an interview or contribute in other ways to this project, please contact Dylan Bryant at dylan.bryant1@un.org and psi@unepfi.org

To access the survey, please visit: https://www.surveymonkey.com/r/UNEPPSIEIL

Thank you in advance for taking part in this pioneering global survey. We look forward to receiving your input!

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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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