Is There a Business Case for ESG Investing?

Authors

• Xin Zhuo

  Former Manager, BSR

I have been working on environmental, social, and governance (ESG) related issues with financial institutions in the Asia-Pacific region for a year and a half now. Recent news and events have indicated that ESG issues are becoming increasingly mainstream. On September 17, China took a major step in promoting sustainable investing by launching its second ESG criteria-based index—the CSI ECPI China ESG 40. Interestingly, stock exchanges in emerging markets have taken the lead on endorsing standardized, transparent ESG disclosures. The Johannesburg Stock Exchange, for example, became the first exchange in the world to require that listed companies move toward integrated reporting.

At the same time, financial services practitioners in China are having more conversations about ESG investing. The Fourth Annual China Investment Management Summit, which I participated in on September 15 and 16, had, for the first time, an ESG panel. The panel allowed international and domestic investment giants to discuss relevant issues. As one of the panelists, I had the pleasure of contributing to the discussion with representatives from the National Social Security Fund of P.R. China and First State Investments.

Besides clarifying terminology and giving an overview of the current state of the global and Chinese sustainable investment market, we focused on the business case for ESG investing as well as the investment opportunities that can result. The other two panelists agreed that investing in companies that have business models that contribute to a stable, equitable society as a whole is a true investment opportunity. Sectors such as clean-tech and issues such as water should be particularly important to investors.

Compared with developed countries, China’s investment market is still underdeveloped. The stock market only has a 20-year history. Institutional investors still play limited roles in the market, and individual investors dominate the stock markets. They are responsible for half of the investments in the A-share market. In addition, the value created from investment in ESG issues is not truly reflected in the stock prices of public companies. For example, after the worst chemical spill in China in 2010, Zijin Mining’s stock price suffered a drop immediately following the scandal but then in no time shockingly returned to the level before the event.

From my experience working directly with a few ESG investors, I do believe that new opportunities for ESG investing in China lie in the immature nature of the Chinese market. With the development and growth of investors and the market, the gap between the ESG leaders and laggards will emerge and continue to expand. The market will eventually reflect a more informed value of public companies. In addition, as environmental and social regulations grow stronger, a new comparative advantage will emerge, and leaders will be rewarded. In other words, the earlier companies can commit to or engage on ESG issues, the more sustainable and profitable their business will be in the near future. The current asymmetry of information provides great investment opportunities, and investors can and should take advantage of the development of China’s investment market.