According to the 1987 Brundtland Commission Report, the definition of sustainable development is “Development that meets the needs of the present without compromising the ability of future generations to meet their own needs”. Sustainability is considering the future by striking a balance between environmental, social and economic factors and the pursuit of improved quality of life.
Environmental, Social and Governance (ESG) is different from traditional financial indicators.
- ESG can be understood as linking corporate sustainability standards with investment decisions.
- Investors and companies are paying more and more attention to ESG performance and realize that it can have a certain impact on the company's reputation, value, business and investment.
Starting from 01 Jan 2016, all listed companies in Hong Kong are required to disclose their ESG information on an annual basis3. By integrating ESG into business strategies, the corporation would be able to mitigate the risks and benefit from transitional opportunities. Therefore, a corporation with better ESG performance tends to have more outstanding financial performance.
According to United Nation led initiative, the Principles for Responsible Investment (PRI), the following are examples of ESG issues:
- Climate Change
- Resources Depletion
- Human Rights
- Modern Slavery
- Child Labour
- Working Conditions
- Employee Relations
- Bribery and Corruption
- Executive Pay
- Board Diversity and Structure
- Political Lobbying and Donations
- Tax Strategy
Climate change - a defining challenge of our time. Different countries, regions and stakeholders are paying more attention to the adverse effects of climate change. One of the reasons causing climate changes is using fossil fuels in many human activities5, such as: power generation, transportation, industrial production and so on. These activities will increase the greenhouse gas concentration in the atmosphere which leads to global warming and deriving different environmental problems: change in precipitation, rise of sea level, loss of ecological and environmental balance and so on.
In order to solve or alleviate the problems caused by climate change, countries around the world are also committed to proposing different solutions:
The Paris Agreement
The Paris Agreement came into force on 04 November 2016, the key provisions of the Paris Agreement call for global actions to:
- Keep global average temperature increase well below 2°C relative to pre-industrial levels and to pursue efforts to limit it to 1.5°C.
- Achieve 'peak' greenhouse gas (GHG) emissions as soon as possible and achieve a balance between carbon sources and sinks in the second half of the 21st century.
China’s Nationally Determined Contributions
China’s nationally determined actions by 2030 include:
- To achieve the peaking of carbon dioxide emissions around 2030 and making best efforts to peak early
- To lower carbon dioxide emissions per unit of GDP by 60% to 65% from the 2005 level
- To increase the share of non-fossil fuels in primary energy consumption to around 20%
- To increase the forest stock volume by around 4.5 billion cubic meters on the 2005 level
Corporate Social Responsibility
- A management concept in which companies integrate social and environmental concerns into business operations and interactions with their stakeholders
- Companies need to strike a balance between economic, environmental and social imperatives and address the expectations of shareholders and stakeholders at the same time.
- It is slightly different from ESG.
- CSR describes a company’s socially responsible commitment, efforts and practices and is often used by corporate side.
- ESG is the term mainly used by asset managers and investors to evaluate corporate behaviour and to determine the material risk and growth opportunities of the companies.
ESG Advantages to Enterprises
Investing in a corporation that has better ESG performance could provide you a long term and sustainable returns.
Today, many investors take into account ESG as a part of the investment decision making process.
- Referring to the report of US Sustainable and Impact Investing published by The Forum for Sustainable and Responsible Investment in 2020, sustainable investing in the United States is gradually growing. By comparing the figures of total US-domiciled assets with sustainable investment strategies, it grew from $17.1 trillion at the start of 2018 to $54.1 trillion at the start of 2020, an increase of 42%.
Low-carbon investing is also an important aspect of ESG strategies as it can help to reduce the impacts of climate change risks and promote green technology.
- By comparing the MSCI World Index and MSCI World Low Carbon Target Index in Feb 2019, the net total return indices are 180.3 and 181.7 respectively, it proves that applying lower carbon strategies does not mean sacrificing investment returns.
Besides, the advantages of incorporating ESG into the business includes:
- increase workforce productivity
- increase organizational resiliency
- increase business opportunities
- identify potential problems in business operation
- handle the risks posed by supervision properly
Companies with stronger ESG strategy can adapt necessary change and identify potential opportunities by capturing the market needs.
Check out the ESG Report of selected companies from 5 different industries: Logistics, Food & Beverage, Food Manufacturing, Environmental and Property Management.