Investors are becoming increasingly concerned about environmental, social, and governance (ESG) factors when reviewing potential investments, especially in developing economies such as China.
In a recent webinar hosted by ValueWalk, guests noted that many Chinese companies do not yet disclose their climate information, but groups like China Southern Asset Management are working to change this by developing its own benchmarks and working with companies.
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The World Is Waking Up To ESG Issues
As the ESG environment improves globally, it is likely that internationally standardized criteria will be applied by policymakers across the country, adapting them to local conditions.
In the meantime, asset managers like China Southern Asset Management are developing their own models to navigate the patchwork of rules, regulations, and disclosures currently in place.
For example, the Southern Fund ESG Comprehensive Information Platform contains information on climate data, management quality, and shareholder engagement. Southern Asset Management is also one of the first asset managers in China to establish a complete carbon emission database.
Unfortunately, these factors are not particularly easy to define, and companies might score well in one area but horribly in another. For example, some businesses might score highly when it comes to their environmental credentials, but they may have poor corporate governance.
As a result, distinguishing between those companies that have the best ESG qualities and those that don't is not as easy as it might seem.
Additionally, some businesses actively try to mislead their investors and the wider market. Thus, it's clear that investors require more transparency so that they can make more educated decisions on ESG-related issues.
A Common Global Goal Of ESG
There is a global consensus among regulatory bodies that more needs to be done to improve ESG visibility. Regulators and policymakers are moving toward a common goal.
Organizations like the International Sustainability Standards Board (ISSB) are issuing sets of ESG disclosure guidelines to regulate disclosures among companies. This should improve transparency, which is good news for investors who want to assess a company's environmental, social, and governance credentials.
ESG is still a relatively new concept in the Chinese economy, but that does not mean policymakers and investors are willing to overlook its importance. For example, policymakers in China have issued a series of regulations to improve the environment, particularly on a regional level.
As the ESG environment improves globally, it is likely that internationally standardized criteria will be applied by policymakers across the country, adapting them for local conditions. In the meantime, asset managers like China Southern are developing their own models to navigate the patchwork of rules, regulations, and disclosures currently in place.
For example, the Southern Fund ESG Comprehensive Information Platform contains information on climate data, management quality, and shareholder engagement. Southern is also one of the first asset managers in China to establish a complete carbon emission database.
Carbon Is Only The Tip Of The Iceberg
Carbon emissions and perhaps, more importantly, the cost of carbon emissions are becoming a hot topic. Regulators and policymakers around the world are introducing schemes to tax companies based on carbon emissions. One of the biggest carbon emission schemes in the world is the EU Emissions Trading System (EU ETS).
This is essentially a tax on the biggest carbon producers in Europe. It places a limit on the right to omit specific pollutants over an allotted period. Companies buy and sell these rights based on their requirements, meaning the biggest polluters have to pay a lot for their emissions.
Other carbon schemes are in development around the world, suggesting investors will eventually have to take into account the cost of carbon when analyzing corporate profits at some point.
Southern's carbon emission database gives it an advantage because it can explore how emissions costs will impact corporate valuation. In doing so, the asset manager can avoid companies that might suffer more than others if Chinese regulators introduce a system similar to the one currently in place across Europe.
Final Thoughts
Some investors might accuse ESG proponents of being driven more by ideology than profit, and in some cases, that might be correct. However, being a good corporate citizen and having great ESG credentials are not mutually exclusive aims.
Introducing ESG factors into investment decisions can help improve long-term investment outcomes, as a focus on ESG can help companies form common interests with all stakeholders. After all, if the world becomes so polluted that humans struggle to survive, most companies won't have any customers left.
What's more, no investor wants to own shares in a business that does not have any regard for its owners. These social and governance factors are just as important as a company's environmental credentials. If investors cannot trust a company's management to act in their best interests, they won't buy their stock.
ESG investing reflects an idea, a reflection of values, and it is possible, as Southern argues, to "do well by doing good." Companies and investors can no longer ignore ESG themes and demands because the cost of doing so could become prohibitively expensive in the long run.
