Over the years, investors have gotten more and more concerned about environmental, social and governance (ESG) issues when picking stocks or other investments. Data from Morningstar suggests the number of ESG-focused investment vehicles has more than doubled over the last five years to surpass 550.
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As a result, it comes as no surprise that ESG investing has circled the world and now started to engulf China as well as Europe, the U.S. and the rest of the West. One critical issue that's popping up in every market where ESG is a growing consideration is the lack of standards in ESG ratings. This was a key focal point during ValueWalk's recent ESG webinar, among other related issues.
The problem with ESG ratings
The participants on ValueWalk's ESG webinar ran the gamut of experts on the topic, including ESG-focused investors, asset managers and journalists. They agreed on the problems with the many ESG rankings available to investors, which have no rhyme or reason regarding the way they rank companies' ESG credentials.
ESG factors can be difficult to quantify due to their subjective nature, and there is no standardized way to rank companies on any of these factors. In fact, a company may have a high ESG ranking in one database but rank far lower on another.
Additionally, companies may do well in one of the three ESG categories but poorly in the other two, which further muddies any attempt to understand where they stand. A related issue is greenwashing, in which companies take steps to make themselves look more ESG-friendly than they really are. The subjective nature of ESG rankings makes it quite easy to do this.
In China, ESG investing is much newer than it is in Europe and the U.S., so it is far less developed as a concept. However, firms like China Southern Asset Management are developing ESG benchmarks in an attempt to help investors understand where companies stand as far as ESG.
The Southern Fund ESG Comprehensive Information Platform includes data on issues like climate change, shareholder engagement, and quality of management. Southern Asset Management is one of the first asset managers in China to create a database on how well Chinese companies deal with climate-related issues and their impacts on the environment.
Increasing Transparency On ESG Issues
Of course, the problems with the current ESG rankings in use by various firms are widely known. In fact, the participants on ValueWalk's ESG webinar discussed them in depth, reaching a consensus in several areas.
For example, regulators on all sides of the globe generally agree that investors need greater transparency on ESG issues so that they can make more educated decisions when choosing stocks or other ESG-focused investments. Efforts to establish standards to inform ESG rankings are underway in some parts of the globe.
For example, the International Sustainability Standards Board is developing guidelines to help companies standardize their disclosures on ESG-related matters. Establishing disclosure standards should go a long way toward improving transparency.
The Importance Of Standards
Having such standards could even inform ESG rankings so that they become less subjective and qualitative and more quantitative in nature. Every step toward improving transparency and standardizing rankings on ESG issues is a step in the right direction toward enabling investors to assess whether a company is a good corporate citizen.
China's hefty weight in the global economy means ESG matters are even more important because massive companies have an outsized effect on the planet and the world's economy. Although ESG is still a relatively new concept in China, neither policymakers nor investors are overlooking the importance of these factors.
In fact, Chinese policymakers have already established regulations governing improvements to the environment. With China being a key driver of the global economy, investors can't ignore its influence on the rest of the planet.
Southern Asset Management believes investors can "do well by doing good," and ESG investing offers one path to do exactly that.
