Sustainable Investment in China Newsletter | Q1 2014

   
 

In This Issue

Editor's Note

The Financial Risk from Ecosystem Malfunction

Many environmental, social, and governance (ESG) risks can arise suddenly and may appear unpredictable to an outside investor—a fire, a labor protest, a compliance scandal—making it hard for investors to incorporate such risks into valuations or risk models. Others can be difficult to assess for different reasons—for example, despite a trend being foreseeable, the consequences and the timing of the impact on companies might be difficult to predict or measure. 

In this issue, we explore this challenge by looking at companies’ dependencies on ecosystem services and their exposure to risk when ecosystems malfunction. New tools are being developed to help companies and investors identify and quantify these risks, which will allow them to incorporate these aspects—previously considered unpredictable and difficult to measure—into business strategies and valuations.

Also in this issue, we summarize the findings in a new report from the Principles for Responsible Investment on corporate bonds, an asset class that requires investors to take a long-term perspective and analyze how underlying trends, such as ecosystem malfunction, might affect corporate business models and credit risk.

Lastly, The next China Sustainable Finance Network (CSFN) event with Hermes EOS and MN, which will explore engagement with Chinese companies, will take place in Beijing on April 4. For more information on the event, or to provide feedback on this newsletter, please contact Adam Lane.


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In Depth

A New Class of Investor Risk: Ecosystem Malfunction

With increasing demands on natural resources, as well as climate change, it is timely to ask decision-makers in the financial services sector whether investments may be undercut in the coming years by ecosystem malfunction risk. Is there a way to develop robust scenarios to understand and avoid ecosystem and natural capital-related risk to investments?

Learn more →


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Insight From the UN PRI

Corporate Bonds: Spotlight on ESG Risks

Interest is rising among credit investors in exploring environmental, social and governance (ESG) factors and the impacts they might have on corporate creditworthiness. Institutional investors are applying strategies from other asset classes, looking at investments through an increasingly long-term lens, and, most importantly, responding to client  demand for enhanced ESG analysis. They are starting to consider ESG factors as leading indicators of credit quality and returns. A new report — developed with the PRI’s Corporate Fixed Income Working Group — explores the case for corporate fixed income investors to consider ESG factors in their investment decisions. 

An academic literature review undertaken by the working group found that available research, although limited in volume, shows compelling evidence that ESG factors can be correlated with credit quality. Similarly, case studies from working group members provide concrete and stark anecdotal examples of ESG factors proving material for holders of corporate debt. There are also emerging issues — including stranded high-carbon assets, water scarcity and demographic change — that have the potential to impact upon credit quality.  

Indeed, investors are responding, with PRI signatories reporting that 67 percent of their fixed income assets are managed subject to ESG considerations. Credit rating agencies, sell-side brokers, regulators, and the financial media are also paying greater attention to ESG factors in the asset class.  

But more research is needed. Particular priorities are: incorporating ESG into credit rating methodologies; relating debt quality to ESG materiality; and identifying leading ESG indicators for fixed income analysts.  

To summarise the report’s findings:

  • The research available makes a compelling case for considering ESG factors in corporate fixed income investments;
  • Investment strategies that incorporate ESG analysis are well suited to credit managers;
  • The relationship between ESG factors and investment performance may not be as clear as it is in other asset classes;
  • Investment managers are responding, driven by asset owner demand, but they require more support from clients and service providers.

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News to Know


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On the Horizon

Upcoming Events

  • ESG Reporting and Investor Dialogue (April 2, 2014 | Hong Kong)

    Hosted by Hong Kong Exchanges and Clearing Limited, this briefing brings together companies, investors, and thought leaders to debate the future of ESG reporting and investor dialogue.

  • Engaging Companies in China (April 4, 2014 | Beijing)

    Organized by the China Sustainable Finance Network, this lunch event features speakers from Hermes Equity Ownership Services and MN.
  • Social Investing in Asia: What Has Worked? (May 14-15, 2014 | Singapore)

    The Asia Venture Philanthropy Network’s annual conference brings together a variety of representatives from different sectors and countries to look at venture philanthropy and impact investing. Keynote speakers include the Managing Director of Bain Capital in India.

  • Impact Forum 2014 (June 12-13, 2014 | Singapore)

    The Impact Forum 2014, “From Niche to Mass,” focuses on accelerating growth in the social finance sector. In-depth forum discussions will focus on the issues and innovations in five key sectors: agriculture, energy, water, education and healthcare.