THE ESG
ESG is short for environmental, social and governance . HKex use ESG reporting as its listing rules.
The ESG concerns different issues such as , Climate change, Diversity, Human rights, Management structure, etc.
Environmental
- Climate Change
- Natural Resources
- Pollution & waste
- Environmental opportunities
Social
- Human Capital
- Product liability
- Stakeholder opposition
- Social opportunities
Governance
- Corporate governance
- Corporate behaviour
SOCIALLY RESPONSIBLE INVESTING (SRI)
Socially responsible investing (SRI), or social investment, also known as sustainable, socially conscious, “green” or ethical investing, is any investment strategy which seeks to consider both financial return and social good to bring about a social change.
SRI VS ESG INVESTING
SRI is an approach to investing that concerning ESG factors.
ESG investing will mostly make investment decisions upon a ESG level (or ESG evaluation level, conducted by 3rd party)
The ESG level mostly will based on company’s ESG reporting, and some other open/private information.
Referring the definition of RESPONSIBLE INVESTMENT from UN Principles for Responsible Investment (UNPRI):
Responsible investment is an approach to investing that aims to incorporate environmental, social and governance (ESG) factors into investment decisions, to better manage risk and generate sustainable, long-term returns.
THE IMPORTANT HINT
Is responsible investment the same socially responsible investment (SRI) or impact investing?
No.
In touching on themes including environmental issues, social issues and sustainability, responsible investment does have similarities with such investment approaches as:
- socially responsible investing (SRI)
- impact investing
- sustainable investment
- ethical investment
- green investment
Crucially, however, while these approaches seek to combine financial return with a moral or ethical return, responsible investment can and should be pursued even by the investor whose sole purpose is financial return, because it argues that to ignore ESG factors is to ignore risks and opportunities that have a material effect on the returns delivered to clients and beneficiaries.
Also, many of these investment approaches target specific themes, such as focusing solely on environmental issues, whereas responsible investment is a holistic approach that aims to include any information that could be material to investment performance.
ESG INDEX
As one the best INDEX company, MSCI known as its MSCI index family, MSCI World Index, MSCI World Investable Market Index (IMI) and MSCI World All Cap Index.
MSCI also established ESG INDEXS, referring:
The MSCI ESG Indexes are designed to support common approaches to environmental, social and governance (ESG) investing, and help institutional investors more effectively benchmark to ESG investment performance as well as manage, measure and report on ESG mandates. MSCI’s ESG Indexes also provide institutional investors with transparency into ESG sustainability and values alignment, together with the ability to compare holdings.
ESG Growing
As UNPRI report, in 2016:
Globally, there are now $22.89 trillion of assets being professionally managed under responsible investment strategies, an increase of 25 percent since 2014.
According to the Japan Sustainable Investment Forum (JSIF), the total sustainable investment market in Japan is measured at 473.6 billion USD, up from 7.0 billion USD during the last review.
Japan also as the fastest growing region from 2014 to 2016.
HOW TO BENEFIT FROM ESG INVESTING
Differ from other investment approach, ESG investing will take three factors on decisions, the 3rd party’s evaluation will make more sense or more accountability for it.
ESG investing has those feature (if ESG evaluation is proper ):
- Higher Profitability : Cash-flow channel: High ESG-rated companies were more competitive and generated abnormal returns, often leading to higher profitability and dividend payments, especially when compared to low ESG-rated companies.
- Lower Tail Risk: Idiosyncratic risk channel: High ESG-rated companies experienced a lower frequency of idiosyncratic risk incidents such as major drawdowns. Conversely, companies with low ESG ratings were more likely to experience major incidents.
- Lower Systematic Risk: Valuation channel: High ESG-rated companies have shown lower systematic risk exposure, evidenced by less volatile earnings and less systematic volatility. Compared to low ESG-rated companies, they also experienced lower betas and lower costs of capital.