This article**: Times Weekly Author: Lu Yongzhi.
*: Photo courtesy of the interviewee.
In 2020, China put forward the "dual carbon" goal, and a broad and profound economic and social systemic change followed. With the inclusion of green finance in China's leading work report, the release of ESG reports has become a must for many listed companies, and ESG investment has become the new darling of the capital market.
ESG investing is an investment approach that incorporates environmental, social, and governance factors into investment decisions. Nowadays, people's attention to sustainable development and social responsibility is increasing, and more and more investors are incorporating ESG factors into their investment decisions, resulting in the continuous expansion of the ESG investment market and becoming an important trend in the global investment field.
ESG investment needs to form a virtuous, positive and comprehensive cycle. Ma Zongming, director of ESG research at China Galaxy, said in an exclusive interview with a reporter from the Times Weekly that the word sustainable investment itself is unsustainable if it only relies on policiesIf we only rely on feelings, ESG investment will only live in a small circle and will not become a mainstream and common investment concept.
ESG investing is a long-term value investing philosophy.
TIME: How do you understand the concept of ESG investing?What are the similarities and differences with traditional investment concepts?
Ma Zongming: ESG investment is a long-term value investment concept that incorporates environmental, social and management factors into the investment logic. ESG requires companies to pay attention to environmental risks, assume social responsibility, and improve corporate governance in the process of development, which are usually not intuitively reflected in traditional financial statements. In the long run, ESG affects the survival and sustainability of enterprises;In the short term, ESG also affects corporate profitability and risk aversion.
ESG investing differs from traditional investment concepts in many dimensions. First, ESG is a more comprehensive investment indicator, considering not only financial performance indicators, but also non-financial performance indicators with financial materialitySecond, ESG is more focused on long-term returns and sustainabilityThird, ESG investment focuses not only on the financial impact on the company, but also on the social and environmental impact of the company's operationsFourth, ESG investors will be more actively involved in corporate governance and influence corporate ESG concepts through post-investment management.
Time Weekly: In your opinion, what kind of empowerment can ESG reporting provide for enterprise development?
Ma Zongming: First of all, ESG reports show the company's sustainability efforts and help attract sustainability-focused investorsSecond, good ESG performance can enhance the market competitiveness of enterprises and provide differentiated services to investors and consumersThird, ESG reporting can help companies identify management, social and environmental risks, as well as avoid transition risks caused by stricter laws and regulationsFourth, ESG reporting is a written demonstration of a company's ESG practices, which can help companies maintain business sustainability through continuous improvement of ESG reporting.
Time Weekly: Do you think the primary goal of ESG investment is financial returns?Or is it sustainable development?
Ma Zongming: Although from the perspective of asset management, it is still inconclusive whether ESG investment has excess returns. But from a company's perspective, most of the literature and practice cases have proven that good ESG is not in conflict with financial returns. Therefore, financial returns and sustainable development complement each other, ESG will bring additional costs in the short term, and good ESG performance can improve the market competitiveness and risk management capabilities of enterprises in the long run, and enterprises should build long-term development strategic goals according to their own business conditions.
TIME: How can investors balance ESG performance and returns?Can ESG generate alpha for investors?
Ma Zongming: The capital market seeks advantages and avoids disadvantages, and if ESG cannot bring excess returns, the money in the capital market will not flow through. The concept of sustainable investment is unsustainable if it only relies on the top-down external driving force of the policy and lacks the bottom-up internal driving force of the capital market. Therefore, under certain conditions, ESG can theoretically bring excess returns to investment;In investment practice, it depends on the investment strategy, investment cycle, and how investors explore the substantive issues of ESG.
Time Weekly: At present, many domestic investors are still holding a wait-and-see attitude towards ESG investment, how do you think we should communicate ESG concepts with investors?
Ma Zongming: China Galaxy ** proposed the ESG 101 model, the first 1 represents the top-down promotion of policies, the second 1 represents the bottom-up drive of the capital market, and the middle 0 represents the dialectical relationship between E, S and G at the enterprise end. Therefore, whether it is a company or an ESG investor, they are all in an ESG system or ecosystem. Guiding investors to understand and recognize the ESG concept requires top-down policy driving to promote ESG practice to a certain extent.
In addition, China Galaxy** conducted a difference-in-difference test using the Science and Technology Innovation Board as a sample, and found that when companies are required to disclose ESG information, they will take the initiative to improve their ESG practices. When enterprises improve the first-chain relationship, improve human resource management capabilities, and avoid transformation and policy risks through ESG practices, capital will recognize that investing in such companies can bring investors more stable excess returns.
The role of financial institutions in ESG investment is indispensable.
Times Weekly: From the perspective of the current situation in China, the ESG report disclosure rate of financial institutions is very high, why is this?What role do financial institutions play in China's ESG development?
Ma Zongming: The high disclosure rate of ESG reports of listed companies in the financial industry is first of all because of regulatory requirements, and secondly, because of the relatively low difficulty of disclosure. The financial industry is a pioneer in the practice of ESG, and from the perspective of China's dual carbon goals, many institutions estimate that achieving carbon neutrality requires more than 100 billion yuan of funds, and more than 85% of this money needs to be obtained through the financial market.
At present, China has the world's largest green credit market, with a balance of 22 trillion yuan. In just 6-7 years since the issuance of the first green bond in 2015, the scale of non-labeled green bonds in 2022 has reached 19 trillion, ranking first in the world in terms of stock. At present, the green financial service system has been established in China, and the role of financial institutions in supporting the green transformation, ESG practice and high-quality development of enterprises is indispensable.
Times Weekly: China's ESG is in the early stage of development, and there are few people who really take ESG as the core strategy. Do you think domestic ESG is more of a concept?How to fix it?
Ma Zongming: At present, Wind divides ESG public offerings into two categories: ESG themes and pan-ESG themes. Among them, ESG themes include pure ESG themes and ESG strategiesPan-ESG themes include environmental protection themes, social responsibility funds, and corporate governance. In general, ESG** invests in a certain theme of environment, social responsibility or corporate governance, and the proportion of pan-ESG is larger.
As for how to solve the problem, the first is to improve investors' investment and research capabilities on ESG, the second is to improve the quality of information disclosure, and the third is to guide the market to reasonably price ESG assets.
Times Weekly: In the practice of ESG investment, what are the main investment strategies adopted by the company?
Ma Zongming: According to the classification of ESG investment strategies, as of November 28, 2023, among the 118 pure ESG themes**, 92 have chosen screening strategies as their investment strategies, accounting for about 78%;There are 20 ** companies that choose integration strategies, accounting for about 17%;Only 2 of them used the integration strategy aloneThere are 4 participating strategies as their investment strategies, and all of them are mixed with screening or integrated strategies.
At present, the use of ESG information by pure ESG themes** is mainly through ESG screening, and the integration of ESG information is still in the initial stage of development. From the perspective of subdivided strategies, 65 of the 118 pure ESG themes** only use positive strategies as their investment strategies, accounting for about 55%;A further 43** investment strategies include positive screening. Overall, there were a total of 108 ** including positive screening strategies, accounting for about 92%;The number of ** containing negative screening strategies is second only to the number of ** containing positive screening strategies, with a total of 46, accounting for about 39%. However, the negative screening strategy is mostly used as the best investment strategy at the same time as other strategies such as positive screening.
Times Weekly: At present, the overall rating of domestic ** companies is not high, what do you think is the reason for this situation?
Ma Zongming: First, the company did not fully demonstrate issues related to environmental protection, social responsibility, and corporate governance, such as carbon footprint management, customer data protection, policy transparency, etcSecond, the disclosure of information is insufficient, and the company does not effectively disclose its ESG efforts to rating agencies and the public;Third, the underlying rating indicators of overseas rating agencies may not be fully applicable to the actual situation of domestic ** companies.
Times Weekly: In your opinion, what can the current ** company do to improve its ESG disclosure?
Ma Zongming: First, increase the transparency of ESG-related information, and try to explain in detail the company's environmental, social responsibility and corporate governance events and achievements in ESG reportsSecond, in the absence of a clear form of disclosure, the exchange should try to follow internationally recognized standards, such as GRI, SASB, ISSB, etc., to ensure comparability with overseas counterpartsThird, multi-channel display, in addition to regular ESG reports, but also real-time updates on the company's website, social ** and other channels. Fourth, for ESG reports that have been disclosed, third-party audits and verifications will be added to increase the credibility of the information.
Unifying ESG ratings requires a blossoming process.
Time Weekly: From a global perspective, what are the similarities and differences between ESG disclosures in various countries?What metrics will you focus on in the ESG reports of A-share listed companies?
Ma Zongming: At present, Japan, Australia, Thailand and other countries are voluntary to disclose climate information, and listed companies are encouraged to disclose climate informationChinese mainland, the United States, South Korea, India and other countries are semi-mandatory disclosures, and constituent companies are generally required to disclose ESG information, with annual environmental, social and governance (ESG) reports, social responsibility (CSR) reports, and sustainability reports as the carriersCountries and regions such as Hong Kong, China, Singapore, and Vietnam have implemented mandatory disclosure and the principle of interpretation if they do not comply, and the degree of information disclosure on ESG reports is relatively strong.
From a domestic perspective, the ESG indicators of the Hong Kong Stock Exchange and the Shanghai and Shenzhen stock exchanges have their own similarities and differences. In terms of the environment, the three major exchanges have put forward requirements for pollution prevention and pollution informationIn terms of social responsibility, all three emphasize the disclosure of social welfare and employees' rights and interestsIn terms of corporate governance, investor relations and internal control information are required to be disclosed on the three major exchanges. For the Hong Kong Stock Exchange, the disclosure of climate-related information is one of its highlights, and it is also in line with international standards in terms of mandatory disclosure.
The requirements of the Shanghai and Shenzhen stock exchanges on the ESG disclosure carriers of listed companies mainly include ESG reports, corporate social responsibility reports and sustainable development reports and other special reports, or interim and annual reports. In this regard, there is no unified standard in the industry, but with the requirements of the State-owned Assets Supervision and Administration Commission for central enterprises to disclose ESG reports in 2023 and the promotion of ISSB disclosure standards around the world, ESG reporting will become a trend.
Times Weekly: What are the characteristics and trends of ESG reports of domestic enterprises?
Ma Zongming: First, the disclosure of ESG information by listed companies is mainly based on social responsibility reports. Second, the banking and non-bank financial sectors have the highest disclosure rate of ESG reports. Third, the larger the market capitalization of a listed company, the higher the disclosure rate of ESG reports. Fourth, the disclosure rate of ESG reports of state-owned listed companies is relatively high. Fifth, there are a large number of listed companies in developed provinces and cities that disclose ESG reports. Sixth, the disclosure rate of ESG reports of companies listed on the Shanghai ** Stock Exchange is much higher than that of the Shenzhen ** Stock Exchange. Seventh, companies belonging to the CSI 300 Index have the highest disclosure rate in their ESG reports.
Times Weekly: What are the suggestions for improving China's ESG data indicators and building an ESG rating system?
Ma Zongming: First, ESG information disclosure rules need to be further standardized, improved and unifiedSecond, the quality of ESG information disclosure of listed companies needs to be further improvedThird, the audit mechanism for ESG reporting needs to be further established and improved, including the establishment of an external audit mechanismFourth, specific ESG indicators need to be updated and iterated with the development of the marketFifth, there is a need to increase ESG-related training and education for companies.
Time Weekly: There are many ESG indices and rating agencies in the market, how should companies deal with and deal with such problems?
At present, the correlation of rating agencies is still very low, but it is increasing year by year, and it is not recommended that companies rely too much on or take a fancy to one rating agency. First, enterprises should take the initiative to understand the rating standards, key indicators and underlying logic of different rating agenciesSecond, companies should clearly focus on the goals of ratings, improve the demands of ratings, and establish ESG short-, medium- and long-term strategic plans based on theseThird, enterprises should actively communicate with investors who are concerned about the development of corporate ESG, and cooperate with investors to carry out ESG post-investment managementFourth, companies need to work with professional third parties to help them with ESG training and optimization.
Times Weekly: Will domestic ESG standards and international ESG standards be unified in the future?
First, the integrationMa Zongming: In the short term, due to the inconsistent development speed of ESG data quality in different industries, and the different focuses and methods of various rating agencies, there will still be large differences between ESG rating agencies for the ESG ratings of various companies, which is normal and belongs to a process of a hundred flowers blooming. In the long run, with the introduction of policies and rules related to the ESG rating system, a certain consensus will be reached on the measurement of some material issues of ESG, and through the selection of the market, rating agencies will become more and more head-notch, and the correlation between rating agencies will also be improved. It is easy to connect, but complete unification still requires a certain degree of difficulty, and market supporting measures are needed, including the further improvement of supervision, talent, laws and regulations.