Green Finance advisor of Friends of the Earth (HK)

Despite the coronavirus wrecking social and economic havoc in countries around the world, one silver lining emerged, that is Environmental, Social, and Governance (ESG) funds have received $125 billions of net inflows from all mutual fund investors globally, in contrast to a net outflow $316 billion for all other equity funds (active and passive) since January 2019.

Figure 1: ESG fund flows versus non-ESG fund flows
(Source: EPFR, Goldman Sachs Global International Research)

More specifically, inflows into ESG funds have in fact surpassed flows into Tech funds over the past year.

Figure 2: ESG vs. Tech fund flows
(Source: EPFR, Goldman Sachs Global International Research)

Of the regions with the highest proportion of AUM in dedicated ESG funds, Europe scores the best with 7%, followed by North America with 2% and Japan with 1%. (Bell, S., Oppenheimer, P., Peytavin, L., Jaisson, G., 2020).

Figure 3: ESG funds as percentage of each region’s dedicated regional funds
(Source: EPFR, Goldman Sachs Global International Research)

Why then is Europe outperforming the rest of the world in the relative allocation to ESG within its fund flows? In fact, European companies on average score higher than much of the rest of the world in its ESG metrics, scoring highest in E&S score, and second only to Australia and New Zealand in Governance metrics. (Bell, S., Oppenheimer, P., Peytavin, L., Jaisson, G., 2020).

Figure 4: ESG ranking of global companies
(Source: EPFR, Goldman Sachs Global International Research)

Based on these findings, we can suggest that (i) there is strong global investment interest in ESG investments and this should not only be considered a cyclical shift, but rather a secular shift with capital holders gradually transitioning to a generation who are more aware of the impacts of socially responsible investing and demands more than just financial return from their investments. (ii) European companies should serve as a positive example and roadmap to the rest of the world that even though ESG compliance may come at a cost, this cost is somewhat mitigated by an increase in demand for the companies’ equity or debt securities due to increased fund inflows into ESG funds, and as a result should reduce the cost of capital for those companies with a good score in ESG rankings, thus disproving the notion that ESG has no financial value and not worthy of expending resources in improving a companies’ ESG rankings.

Europe’s success is an effort borne out of collaboration between regulators and private enterprises, as well as a public supportive of the benefits of improved ESG compliance. For us in Hong Kong, even though we pride ourselves with one of the freest economy in the world with minimal regulation, a position we have been able to maintain as a result of riding on the economic growth of the opening up of China over the past 40 years, our government ought to think more about implementing ESG requirements for companies listed in Hong Kong to keep up with the times. Especially at a time when Hong Kong can no longer rely on being the freest economy in the world to remain competitive, and must find its own niche within the Greater Bay Area to compete, introducing ESG regulations have the potential to set Hong Kong as the leader of socially responsible investing in China, much as such government led efforts of placed Europe at the global forefront in this area. Moreover, with many Chinese companies listed overseas set to repatriate listing to Hong Kong due to the geopolitical tension between US and China, Hong Kong has a unique opportunity to set the ESG standard for many national champions of industry through reporting and listing requirements.

In summary, Hong Kong has a rare opportunity in becoming a leader in setting ESG standards and should make implementing ESG listing and reporting requirements in collaboration with private enterprises a top priority, to ensure it carves out a niche for itself and allow it to stay competitive within the national economic system.

Reference

Bell, S., Oppenheimer, P., Peytavin, L., Jaisson, G., 2020. Europe outperforming US: Can it last?, Goldman Sachs Global International Research

Bell, S., Oppenheimer, P., Peytavin, L., Jaisson, G., 2020. The ESG trend is Global…and alpha as much as beta, Goldman Sachs Global International Research


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