Why Now is the Time for ESG Investing?

Climate change and environmental degradation are no longer warnings to be heeded for future generations. From plastic-choked oceans to uncontrollable extreme weather events like floods and wildfires, the problems long heralded by climate and environmental scientists are here today, and are only getting worse. 

In response the investment community is increasingly taking action to ensure that their financial decisions do not have a negative impact on the well-being of our planet, in the meantime, the Covid-19 crisis has thrown ESG investing into the spotlight, and some fund groups are using the pandemic to push for positive change. We are at an inflection point in ESG investing, and here's why.

ESG – environmental, social and governance – factors as part of an investment strategy is no longer a gimmick or “greenwashing” – a nod to corporate social responsibility (CSR) –but is increasingly a built-in part of many investors’ strategy. 

According to the Global Sustainable Investment Alliance (GSIA), investment in sustainable investing assets across Europe, the US, Japan, Canada, and Australia and New Zealand rose to US$30.7 trillion by the start of 2018, an increase of 34% increase over 2016 figures.

BlackRock, one of the world’s leading investment funds, stated earlier this year that sustainability should be “our new standard for investing,” insisting that even today “sustainability- and climate-integrated portfolios can provide better risk-adjusted returns to investors.”

While uptake has been slower in Greater China than in other parts of the world, ESG analysis has become an increasingly important part of the investment process for many investors.

“We should hold our investees to the same standard that we hold our own business to. We went down the ESG/sustainable finance route because we identified that it was a new way of calling what we call good business,” says Michael Au, Managing Director of District Capital, a family-run, Hong Kong based investment firm.

“We cannot only rely on financial data that’s been disclosed on annual reports, ESG gives non-financial data to better understand businesses in a holistic manner, and the risks involved such as climate risks and other new financial risks that we are seeing in the world today, he says.

Going forward, Hong Kong can seize a “great opportunity” if it can capitalize on being a hub for green finance and ESG reporting, says Au.

Recent advances in technology have vastly reduced the costs and ease of accounting and reporting on ESG data, says Au, giving management and boards the ability to see, in real time, its impact on their bottom lines. 

“[In the middle of the pandemic] there’s a heightened interest in health and biotech and public health, so that’s understandable,” says Au. “We’re seeing a lot of very big movements in the market in response to that. The second which is a rising trend is the collection and rise of ESG data … how companies not only collect ESG data but collect it from their frontlines and take it back to the hands of decision makers. That kind of data service has a lot of room to grow.”

“I expect we’re going to be seeing a lot of innovations in the ESG accounting space coming out of China because there’s a pure need for it. There’s a wide range of heavy industries, manufacturing, that a lot of the established markets don’t have within the ecosystem that we will have to account for in China that will make a lot of the adjacent service providers for ESG a huge opportunity.” 

“A long-term sustainable future profit can only be realised if we have sustainable resources and a supportive community.”

While more and more investors – and the companies they invest in – are serious about baking their sustainability goals in for ethical reasons, the bottom line remains a key factor, says Entela Benz-Saliasi, CEO & co-founder of Intensel Limited, a climate risk analytics firm and Adjunct Associate Finance Professor at HKUST Business School.

“It’s not about ticking the box, which most companies still do, it’s more about recognising the impact of the environment and climate on the bottom line, on your business operations. Measuring these risks enable the companies to react to E, S and climate information in a meaningful way,” she says. 

At the end of 2019, Hong Kong’s stock exchange amended its requirements for ESG reporting to improve ESG governance and disclosure, an indication of the relevance of these non-financial factors for investors in the SAR. 

The increased focus on ESG, by investors, regulators and governments in Hong Kong and across the region is welcome news for a number of companies, particularly startups with a focus on using tech to improve the environment and to help in the urgent push to slow the planet’s environmental degradation. 

Managing the Financial Risk of Climate Change

The last few years have seen a visible uptick in the frequency of extreme weather events – a very real sign of the immediacy of the climate crisis. For Entela Benz-Saliasi, the CEO & co-founder of Intensel, the damage wrought by hurricanes and typhoons, wildfires and floods are the financial wakeup call that many in the business and political establishment need to address climate change. 

“[Extreme weather] incidents are becoming more frequent and more severe, and the financial losses are getting bigger. You have about US$300 billion per year, and only four decades ago it was only around $80 billion. The forecasts are by 2030 the losses will increase to one trillion – a 300% increase. 

She says that insurance against these types of weather events is extremely low. At the end of the day, taxpayers and corporations are paying from their own pockets. Climate risk has now become a systematic risk, repricing all the risk in the economy. That is the reason why regulators are pushing for disclosure on climate and potentially on uninsured expected losses.” 

Intensel came out of this crisis, using climate data for predicting financial risks to help clients assess climate risk for building, insuring and financing a climate-resilient infrastructure. “It’s a heavy and complex science and the playground of only a few scientists and the insurance companies. We, at Intensel, are trying to make climate analytics simple and meaningful enough for companies to see and act on.”

“If we want investors to react, we have to make climate data visible to them – how much impact it has, what the consequences are in terms of risk, losses as well as opportunities. [Intensel] makes it tangible, so that’s the whole point of creating the company.” She says the technology has improved immensely in recent years. Even as recently as two or three years ago the technology wasn’t nearly as powerful as it is now.  

“We can now predict and analyse climate risk in a comprehensive way. We use big data, AI, supercomputers, dynamic climate models and financial technology to simulate climate risk and then translate climate risk into a dollar value at risk related to climate.”

The company is striving to make the climate data it crunches accessible to all, allowing corporations and investors to see and understand the risks of under-addressing what many scientists, along with the World Economic Forum, consistently rank as one of the most pressing issues of our time. She says that working with that data has allowed her to see both the scale and urgency of what needs to be done. 

“The impact is here long term, but we have to address it short term. If we don’t address it now, in five years we have to address it much more drastically, and more expensively. Now we have to cut carbon by seven percent per year if we want to achieve the Paris agreement, which is even beyond our reach, yet we [are] starting now.”

Moving Toward a Circular Economy

Images of plastic waste covering beaches and choking waterways are not new but with each passing year the urgency to find a solution to limit non-biodegradable plastics entering natural ecosystems has only grown, and consumers are ever more aware and alert of the sustainability challenges we all face.

Plant-based plastics are often derided for being flimsy and unable to match the durability of their traditional counterparts, but George Chen, CEO of Ecoinno, a Hong Kong-based green material company is on a mission to change that perception. 

Ecoinno’s patented Green Composite Material? (GCM?) is a plant-based polymer that aims to replace plastics, and the company is currently focusing on food packaging, given its role as one of the most common examples of single-use plastic. It is made of natural plant fiber, “the most abundant renewable resources on Earth,” according to Chen. 

“Because of its engineered characteristics, GCM? meets the basic functionality of single-use plastics in terms of tensile strengths which is three times stronger than plastic and bioplastic, and tolerates various temperatures, water, and oil, similar to traditional, oil-based plastics. It is versatile and its potential applications are many.” 

“GCM? can be 100% broken down into soil within 75 days without harsh conditions, it can also be turned into fuel, generating energy, it’s how Ecoinno is creating a circular economy that enables stakeholders to take part and benefit from it,” he says. 

He says that the incentives for changing to plant-based plastics are “compelling but we need to connect the dots for investors and customers,” and in the case of the former, helping them see the connection between ESG and business values, “helping them make sound decisions about how to allocate capital and resources.”

He says that their technology is challenging the “hardwired” presumption that eco-friendly products and services come with a premium and require trade-offs, often financial ones. 

“We are here to break the notion that eco-friendly is costly. Ecoinno offers new materials and a scalable solution that is cost-efficient. We provide brands and consumers plastic alternatives without breaking the bank. 

“Consumers can start by becoming more informed, then practice making conscious choices. Breaking habits and changing behaviors are never easy but [Ecoinno] makes everyday decision-making simple.”

“Our missions are clear: we replace single-use plastic; reduce the carbon cycle; turn waste into energy - all without a hefty price tag. So instead of asking: Will this product biodegrade? Can I afford it? Consumers only have to answer one question: Am I committed to be a part of the solution? It’s a simple yes or no.”

He agrees that Gen Z and millennials are leading the charge for change and are willing to spend premium on sustainable goods. But he says that as a global problem, environmental concerns, and the consumer choices each of us makes, are crucial.

“Everyone has a stake in sustainability. We move forward together, or we don’t.”

Shaping the Future of Food 

There is a lot of buzz around alternative proteins these days, with plant-based alternatives making headlines for their meat-like verisimilitude. The next step, believes Carrie Chan, CEO of Avant Meats, is to grow actual animal protein in a lab, taking away the environmental, health and ethical issues that surround eating meat. 

“We developed the technology using cell and tissue engineering to produce any protein or meat without the need for raising and slaughtering animals,” she says. 

While there are scores of companies working towards the goal of a lab-based burger, Avant Meats has chosen to focus on seafood. 

As the first cultivated protein producing company in China and the first to produce fish and marine protein in Asia, Chan says that cultural considerations in China and across Asia have guided Avant’s development. Still a few years away from market due to legislation processes, Avant is looking to replicate some of the region’s most prized – and pricey – seafood delicacies in order to achieve price parity as soon as possible. 

“When we look at the landscape in China and Asia we looked to see if there was anything considered exclusive but more expensive and so for our pilot product we’re looking at fish maw – we’ve found a lot of interest here in Hong Kong and southern China, and Asia as well down to Singapore and Thailand. This allows us a little bit of a different go-to-market strategy.” 

Lately, the cell-based food tech has just unveiled the region’s first cultivated fish fillet, the company has expanded to disrupt a more mainstream category of seafood. 

Chan sees the meat-free lifestyle as a trend that is set to only strengthen over the years as more and more consumers question the environmental and ethical concerns that eating farmed animals pose. She refers to the embrace of plant-based protein alternatives as an encouraging sign that consumers will happily take to cultivated meat, which, she points out, will have exactly the same texture, flavour and nutritional content of a real piece of animal protein. 

“If people can switch and go [for] plant-based which mimics meat, I don’t see that there would be a major problem for people to eat a product that is biochemically identical to real meat. We will take a few years for people to get used to the idea but then we anticipate that people will actually look out for that.”

“If it’s wild-caught, people will be concerned about heavy metals, if it is cultivated in a clean, controlled and closed system, they’ll be more comfortable. I think the psychological hurdle will be overcome very quickly. Eventually, a few decades later, people will be totally oblivious to where it’s coming from.”

Sustainability is Pivotal to Good Business

ESG is not just window dressing or compliance, or even risk management but an opportunity, Au says. 

“It’s getting easier – the writing’s on the wall,” he says. Before companies or investors can come around to embracing ESG as a core tenet to their business strategies, they tend to think about the tradeoff, if they are focusing on sustainability, are they sacrificing [returns]? That’s something we’ve disproven.

Once companies accept that sustainability is something that’s here to stay and needs to be built in for resilience, he says there is a process towards embracing this new way of thinking. 

“The first in compliance, they do the bare minimum that’s required, to get through regulations. The second is risk mitigation, as they realise that they’re risking their future. The third, the upper echelon, are the companies that see the opportunity – this is not only climate risk, for example, but it’s actually an opportunity for them to grow.” 

He cites the energy giant BP as a company looking to diversify and trying to do more and invest in hydrogen as an alternative fuel, because they know that fossil fuels are no longer able to sustain their business long term. 

“People go from ignoring to doubt, to compliance and risk mitigation to opportunity.”

Sustainable investing is growing steadily in Asia, particularly in family offices and private investors, they are beginning to see longer-term plays, and turning their heads to startups that are focused on ESG, similar to investors in other parts of the world.

Much of the push is being led by younger investors, he says. “I don’t think there’s any question that the climate crisis is real, and we’re on the cusp of passing the point of no return and we need to move quickly. For most of the next generation [of investors], this is very high on their agenda.”

As an early adopter, he hopes that others will come on board and realise the benefits of investing in our shared future, not just financial return. Indeed, he says it’s critical that investors come round to the sort of ideas that companies drive sustainable innovations.

“The solutions [they’re offering] are what we need to advance a more sustainable earth. Is there enough money being put towards it? No, not even close. The deficit of what needs to be spent towards the sustainable deficit goals and what’s actually being put towards it, I think it’s one tenth, or even less. It’s not enough but that doesn’t mean that we can’t be doing it, moving towards that critical mass.”