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What is ESG investing? Why should investors care about ESG?
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ESG and responsible investment
Environmental, social and governance (ESG) factors have become a growing focus among various sectors in recent years and a number of research reports have revealed
the impact of ESG factors on companies’ long-term performance.
Companies that conduct their business in a responsible and sustainable way are more likely to deliver value for investors and positive impacts on the world in the long term.
What is ESG investing?
Financial fundamentals have always been given priority in traditional investment process. However, due to the rising concern for corporate social responsibility (CSR), some investment strategies are integrating environmental, social and governance (ESG) factors into analysis with an aim to arrive at the most favorable investment decisions. This approach can help investors achieve financial return without taking excessive risk, and it also contributes to a more sustainable future. These investment strategies are called responsible investments.
Key trends that drive ESG investing
Climate change and global warming are considered the top risks affecting the sustainability of economic and corporate development
According to a survey conducted by the World Economic Forum, in terms of the likelihood to occur, respondents identified climate change to be the riskiest event globally. Moreover, the risk of biodiversity loss, which is closely linked to climate change, is also on the list
Top 5 risks affecting the economy
Source: The Global Risks Report 2021, World Economic Forum, as of 21 January 2021.
Although environmental issues (E) have taken the centre stage in ESG investing, social issues (S) are stepping into limelight
Social factors focus on how companies manage their relations with employees, customers, and the communities
Companies without proper management of social issues are exposed to severe reputational and financial risks
Social factors in ESG
Investment markets play a pivotal role in driving better corporate ESG performance. However, ESG performance is hard to quantify in comparison to traditional financial performance
To help investors make better investment decisions, a set of standardised and easily comparable assessment is necessary to reduce the risk of misvaluation and facilitate comparison of ESG performance among different companies
Regulators around the world, such as that of the EU, the UK, mainland China, Hong Kong, New Zealand and Australia have all introduced rules to strengthen corporate ESG disclosure
Enhanced ESG disclosure requirements across the globe
For some time, ESG investments have been largely concentrated in equity as the asset class accounts for over 80% of total ESG assets. However, rapid development in the sustainable bond market in recent years has created a more diversified pool of ESG assets for investors to explore a greater variety of opportunities
With the growing demand for ESG investments, ESG thematic funds have emerged as an option for investors in recent years
These funds allow investors to invest in specific ESG investment themes such as renewables, waste and water resource management, and sustainable healthcare, covering solar panel and wind turbine manufacturers, consumer goods producers that actively reduce waste along production and consumption chains, as well as remote healthcare services providers etc
Global green bond issuance (2015-2020)
Source: The Securities and Futures Commission of Hong Kong, as of 16 October 2021.
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Important information
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Climate change and global warming are considered the top risks affecting the sustainability of economic and corporate development
