Michele Leung, Green Finance Advisor of Friends of the Earth (HK)
There are different types of investors within ESG investing world, with diverse ESG investing objectives and sophistication. For those who are early in their ESG journey, they may focus on the negative screening, which is not to invest in companies that have certain business involvements i.e. tobacco, alcohol or controversial weapons. There are also value investors who want to focus on making positive impacts to the environment and society. Increasingly, we are seeing more ESG investors who integrate ESG across their whole organisation and investment management processes from enhancing their fundamental and quant analysis, to using ratings and data for portfolio construction and to develop new ESG products.
Potential tradeoffs exist between different ESG issues, for example, there might be a company that provides some sort of positive impact using processes that are exploitative or unsustainable. As highlighted in the podcast <<The Conflict Within ESG>>[1], there was a Nordic restaurant that promoted eco-conscious food movement and more sustainable practices in their supply chain while being accused using unsustainable labour practices. Conflicts may arise for investors, particularly value investors, within ESG investing.
The podcast then dived into solar industry for the illustration of the conflict within ESG. China accounts 97% of the world’s global wafer manufacturing capacity and 85% of sales. There are some accusations regarding its supply chain exposure that use forced labour in the Xinjian province. It is not only a reputation risk, but also emerged as a regulatory issue since the U.S. legislation “Uyghur Forced Labor Prevention Act” presumptively banned all products manufactured in a region they identified using forced labour. Further assessment revealed that the companies manufacture solar modules and cells also have exposure to controversial sourcing, due to its reliance on imports of 3TG minerals (namely tin, tantalum, tungsten and gold). It indicated these companies have limited supplier due diligence efforts to track conflict-free sources.
Solar and renewable energy is obviously a critical solution for climate change and in reaching net zero. While the opportunity in clean technology is broad, how should investors prioritize clean energy vs. possible supply chain violation and controversial sourcing issues?
Ultimately, there are
different set of priorities and constraints between ESG and value investors. As
any investors, it is fundamental to understand the investing objectives and
limits on what you can do with your capital. Hence, investing in data and due
diligence can provide more transparency on the
double materiality i.e., assessing how ESG issues can impact the risk/return
profile of portfolios, and how portfolios may impact the environment and
society. Rather than avoiding the
trade-offs, investors should be better equipped to define their own house view
on ESG investing priorities.
[1] The Conflict Within ESG, see link: www.msci.com/research-and-insights/podcasts/esg-now/the-conflict-within-esg