Environmental, social and governance (ESG) factors are becoming of greater and greater importance for investors who are considering the wide array of possible investments, especially in China and other developing markets. As a result, the need for sources of ESG information has never been greater.
Awakening To The Need For ESG Transparency
Participants on a recent webinar hosted by ValueWalk pointed out that some companies don’t reveal enough information about how their business affects climate change. However, firms like China Southern Asset Management are developing benchmarks for ESG and working with companies on their climate-related disclosures.
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As views of ESG issues continue to spread around the globe, it's likely that policymakers are developing standardized criteria that hold up internationally. Policymakers are also expected to adapt those criteria to fit their own local requirements.
For example, Southern Asset Management is one of the leading asset management companies in China we know so far to develop a database containing complete information on how companies deal with the environment.
Meanwhile, we noticed a recent announcement from UN-PRI that the company is shortlisted for the PRI 2022 Responsible Investment Award on its "Facilitating Climate Transition-Application of Carbon Emission Database" project.
However, there is an issue that some companies rank highly in one ESG dimension but neglect others because ESG factors sometimes tend to be subjective and qualitative. For example, some companies might have a strong track record in how they support the environment but poor practices when it comes to corporate governance.
Thus, it can be quite challenging to determine which companies are the most ESG-friendly. Further, greenwashing has become a real problem in the industry, as many companies actively try to make themselves look better from an ESG standpoint than they really are.
For these reasons, investors need significantly more transparency on ESG information disclosure so that they can make wiser investment decisions.
Improving ESG Visibility
Regulators around the globe generally agree that more must be done to improve transparency regarding ESG issues. As a result, policymakers are generally on the path to developing common goals.
For example, groups like the International Sustainability Standards Board are issuing guidelines for ESG disclosures by companies. Such steps should improve transparency around these issues, which is excellent news for investors wanting to assess a company's progress on ESG matters.
Regulators around the globe are working on improving company disclosures to increase ESG transparency, better enabling investors to assess whether a company is generally a good corporate citizen. In China, this is especially important due to its vital position in the world's economy.
While ESG is still a fairly new idea in China, neither investors nor policymakers are overlooking the critical importance of these factors. For example, Chinese policymakers have established multiple regulations aimed at improving the environment, especially from a regional standpoint.
With its massive manufacturing industry, many investors see the Asian nation as the driver of the global economy. Additionally, China's influence over the world's economy is growing as a result of its flourishing consumers. These are just the primary reasons investors can't afford to ignore China.
Starting With Carbon Emissions
Of course, changes can't be made without starting somewhere. As China proposed “Carbon peak and carbon neutrality” targets, one of the starting points for ESG in China is carbon emissions, particularly the cost of those emissions.
Policymakers and regulators around the globe are developing ways to tax carbon emissions from businesses. The European Union's Emissions Trading System is one of the world's largest carbon emission schemes today.
The EU ETS basically amounts to a tax on Europe's largest carbon producers. The plan also imposes a limit on eliminating certain pollutants over a set period. European companies buy and sell the rights to use those pollutants based on their needs, which means the continent's largest polluters pay significant amounts of capital for their emissions.
Policymakers around the globe are developing other carbon-related schemes as well. As a result, investors will eventually have to consider the cost of carbon emissions on the companies they consider investing in. High carbon costs will detract from a company's bottom line, cutting into its profits — sometimes dramatically.
Southern Asset Management's database on carbon emissions provides an advantage because the firm can research and analyze how the cost of emissions will impact a company's business. This analysis may reveal the companies that could sustain greater fiscal damage than others if Chinese policymakers implement a tax scheme similar to the one being used in Europe.
Wrapping up
The matter of ESG has become controversial on some levels amid accusations of focusing more on philosophy than profits. However, some ESG proponents are also concerned with how these environmental, social and governance issues impact a company's financial performance. Additionally, being a good corporate citizen and focusing on ESG issues are not mutually exclusive.
Including ESG issues as a factor in selecting investments can boost returns for investors because an ESG focus can help companies find common ground with all their stakeholders. Of course, if the human race struggles to survive due to the damage caused by widespread pollution, companies won't have any customers yet.
Further, investors simply don't want to own a piece of a company that doesn't respect its owners and their wishes. This is why the "S" and "G" issues, social and governance, are just as critical to investors as the way a company treats the environment. Investors who can't trust the company's management to act in their best interests will not purchase their shares.
Southern Asset Management believes that it's possible to "do well by doing good," and ESG investing offers an pathway to do exactly that. Neither investors nor the companies they invest in can ignore ESG issues any longer because doing so will become prohibitively expensive as time goes on.
