ESG stands for "Environment, Social Impact and Governance", which has become a standard for ethical operations in the view of global investors. ESG deserves more attention from Asian supply chain companies. To give our readers a more in-depth and comprehensive knowledge about ESG from the investor's perspective, DIGITIMES has invited QIC as a contributing partner to share their insights in a 5-part series: 1) Should companies invest in ESG? 2)Third-party ESG reporting 3)ESG metrics matter 4)A Resource Guide for Staying Up To Date on the Recent Trend Towards Global Unification of ESG Reporting Standards and 5) Getting Ready for Climate-related Financial Disclosures. The article is the first part of the QIC ESG Series, which was originally published on QIC website.
Institutional investors integrate ESG into their investment decisions
In 2004, the UN Secretary-General Kofi Annan invited CEOs of 55 of the world's leading financial institutions to develop Principles for Responsible Investment (PRI) which was launched at New York Stock Exchange in 2006. The principles provide a framework for investment decision-making sufficiently reflecting environmental, social, and corporate governance considerations. The following year, 20 well-known institutional investors, including Goldman Sachs, Morgan Stanley, and BlackRock, launched a report called "Who Cares Wins", reaching a consensus that long-term investment and long-term business growth are closely related to ESG.
Larry Fink, CEO of BlackRock, which is the world's largest asset management company, emphasized that sustainability should become BlackRock's new standard for investing, and said that climate change has become a defining factor in the company's long-term performance. Investors should be more aware that climate change will drive a "fundamental reshaping of finance." For example, climate change will require infrastructure rebuilding, how will it affect the public bonds market? Frequent floods and droughts can cause food prices to rise, how will it affect inflation and interest rates? When emerging markets are affected by extreme weather, which causes productivity losses, how to evaluate the growth of global economy? Blackrock warns investors, "Climate risk is investment risk." (1)
Although institutional investors incorporate ESG risk and opportunity factors into their decision-making process in varying degrees and methods, it is undeniable that ESG integration for equity investment has become a new trend. "All investors are saying, 'I want to invest in companies doing right by society,'" Brian Moynihan, CEO of Bank of America, said at the World Economic Forum in January this year. Moreover, Third-party ESG Reporting such as MSCI ESG, Sustainalytics, and sustainability reporting frameworks such as Sustainability Accounting Standards Board (SASB), Global Reporting Initiative (GRI), CDP (Carbon Disclosure Project), and many other organizations are working on developing ESG standards and defining material ESG issues of various industries to facilitate incorporation of ESG factors into the investment decision-making process for institutional investors.
The continued growth of socially responsible investment
Socially responsible investing has attracted the attention of the investment community in recent years. Nowadays, in order to exert a positive influence on our society and environment when pursuing outstanding financial returns, investors not only consider company's financial performance but are also integrating ESG considerations into their investment decisions.
According to the statistics of the Global Sustainable Investment Alliance in 2018, global sustainable investment has reached US$30.7 trillion, which increased 67.8% and 34.6% compared with 18.3 trillion in 2014 and 22.8 trillion in 2016.(2)
It is also worth noting that $30 trillion in wealth will be transferred from baby boomers to millennials in the next few decades. According to statistics, 95% of millennial investors were interested in sustainable investing in 2019 which is an increase of 9 percentage points from 2017; 89% of millennials expect their investment managers to do a deep dive into a company's ESG factors and history with ESG issues before recommending an investment opportunity; 88% of high-net-worth millennials are actively reviewing the ESG impact of their investment holdings.(3)
Covid-19 accelerates the growth of sustainable investment
The spread of COVID-19 pandemic has had a dramatic impact on the global stock market, however, the COVID-19 pandemic has accelerated the trend to sustainable investment. According to Morningstar, sustainable funds in the United States attracted $10.5 billion of net flows in the first quarter, which breaks the record set in the fourth quarter in 2019.
Photo: QIC
Sustainable indexes outperform the parent indexes
Take MSCI Emerging Markets Asia Index and MSCI EM Asia ESG Leaders Index as examples. The chart below shows that MSCI Emerging Markets Asia Index rose 2.9% from September 2007 to June 2020, meanwhile, MSCI EM Asia ESG Leaders index rose 6.4% which outperforms the parent index.(4 )
QIC
Photo: QIC
The uncertainty arising from COVID-19 pandemic has caused an increase in global stock market volatility. As of June 30 this year, MSCI Emerging Markets Asia index fell 3.39%, while the MSCI EM Asia ESG Leaders index dropped only 0.24%. In addition, 14 of the 16 MSCI ESG indexes outperformed the parent indexes. It shows that companies with better ESG performance were less vulnerable to market volatility and more resistant to the market crash.
Managing ESG risks and opportunities while pursuing sustainable operations is undoubtedly the future trend of enterprise development. Companies should be well-prepared for the rise of sustainable investing by providing better disclosure of ESG information, increasing awareness and participation of the board of directors and management team, and improving communication with institutional investors. Our team consists of experienced professionals who previously worked at well-known global brokers and buyside funds. QIC has worked with many listed companies in Taiwan on improving their ESG communication and on attracting long-term focused investors.
Sources:
(1). BlackRock Larry Fink's Letter to CEOs
(2). 2018 Global Sustainable Investment Review (Global Sustainable Investment Alliance)
(3). Swipe to invest: the story behind millennials and ESG investing (MSCI ESG Research)
(4). MSCI EM Asia ESG Leaders Index Performance Fact Sheet
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