On December 10, 2021, the University of Hong Kong ICB invited guest lecturers from the University of Hong Kong ICBDr. Shi HanSurroundingESG helps achieve national carbon neutrality goalsFrom the perspective of ESG development and evolution dynamics, green finance, information disclosure, sustainable supply chain management and other aspects, the lecture deeply analyzed how Chinese enterprises should grasp the challenges and opportunities in the process of "carbon neutral" transformation through ESG against the backdrop of frequent global crises such as the COVID-19 and climate change.
ESG is a pathway for companies to create long-term value
Dr. Shi first pointed out that the so-calledESG, E represents environmental factors, S represents social factors, and G represents corporate governanceIt'sIt is a new value concept and evaluation management tool that promotes long-term value creation for enterprises.The COVID-19 pandemic has exposed a series of social inequality issues, which has led to greater recognition and attention for ESG globally.
In the traditional development model, enterprises maximize their profits by externalizing environmental and social costs. For a long time, enterprises have not borne the negative environmental and social costs they generate, and these externalized costs are ultimately borne by the entire society, with low-income groups disproportionately bearing greater costs. The environmental and social costs are detached from the framework of enterprise cost accounting, which is the fundamental reason for many environmental damage and social inequality problems at present.
Since World War II, the global resource and environmental burden has been increasing day by day, and some scholars have pointed out that the impact of human activities on the Earth has exceeded the safety boundary of the planet. From the perspective of enterprises, incorporating social environment and governance (ESG) into their investment decisions is not only to demonstrate their sense of social responsibility, but also to help them resist the risks brought by rapid changes in the external business environment, seize new opportunities in a timely manner, enhance their competitive advantage, and create long-term value.
Dr. Shi conducted a comparative analysis of the requirements for corporate ESG management from the perspectives of domestic and foreign government regulation and investment. He pointed out that,Policy makers are constantly updating and adjusting their requirements for corporate ESG management, and exchanges are also mandating issuers to regularly disclose their ESG risk and opportunity management practices and performance in listing rules.The United States, France, South Africa, and Hong Kong all have varying degrees of mandatory requirements for companies to disclose ESG reports, while domestic exchanges allow companies to voluntarily disclose non-financial information.
At present,Many investment institutions have incorporated ESG into their investment decisions.Dr. Shi pointed out that enterprises are the root cause of many environmental and social problems nowadays. Relying solely on government regulation and non-governmental organizations' public welfare and charity cannot solve the fundamental problems. Only by transforming enterprises themselves into solvers of environmental and social problems can we ultimately win the battle of environmental protection and sustainable development.
Two key factors to support the ESG development process of enterprises
To change the traditional development model and incorporate social and environmental costs into the overall business decision-making of enterprises is a very arduous and lengthy process of social change. There are two key points to breaking the deadlock:
One is to start with large financial institutions that provide financial blood for the entire economic activity and develop sustainable finance.Specifically, it means incorporating ESG principles into the operational decision-making process of financial institutions, so that their own activities and clients they serve must follow ESG principles, thereby promoting downstream enterprises to adopt ESG principles and management methods;
The second is to use the stock exchange as a driving force to require listed companies to strengthen ESG related information disclosure, and then promote listed companies to carry out sustainable supply chain actions, driving downstream small and medium-sized suppliers to transform their production models, gradually promoting and realizing the fundamental social change of internalizing their environmental and social costs.
Dr. Shi analyzed that from an economic perspective, consumption determines production. Whether consumers are willing to pay higher prices for green products determines whether companies have greater willingness to produce green and environmentally friendly products. Conversely, some leading companies consciously guide consumers to enhance their green consumption concepts in their social responsibility practices.
Enterprises, including the vast number of small and medium-sized enterprises in developing countries, will not actively accept painful changes that internalize their environmental and social costs. However, if the whole society cannot effectively promote the fundamental transformation of this production mode, the whole society may fall into the abyss of self destruction.
Green finance is an important direction for future financial development
When it comes to green finance, Dr. Shi believes that the current ESG craze originated from ESG investments that only emerged in the early 21st century. In the 1980s, corporate social responsibility investment (SRI) emerged, and investors chose not to invest in so-called "sin stocks" in industries such as gambling, tobacco and alcohol, weapons, and pornography, which may have high profits, as an expression of their social responsibility. In 2006, ESG investment was first proposed under the advocacy of the United Nations. In 2008, the United Nations launched the Sustainable Stock Exchange Initiative, which began to promote ESG from the perspective of listed companies.
Regarding the situation in our country, Dr. Shi talked about the first large-scale environmental protection storm in China - the "Zero Point Action". In the 1990s, pollution in the Huai River Basin was extremely severe. On January 1, 1998 at midnight, the deadline for 1562 key polluting enterprises in the Huai River Basin of China to control pollution and achieve standard discharge was met - all enterprises in the Huai River Basin that did not meet the standard for sewage discharge were shut down and converted. As a result, the Agricultural Bank of China suffered serious economic losses due to loans provided to "Fifteen Small" polluting township enterprises. This is the first time that environmental risk has become a financial risk in China.
Dr. Shi pointed out that,The essence of 'green finance' is to internalize the environmental externalities caused by financial business activities, thereby promoting the overall greening of economic activities.To this end, it is necessary to increase the flow of financial resources towards economic activities that protect the environment and conserve resources, and reduce the flow of financial resources towards economic activities that pollute the environment and damage the ecology. In China, the impact of ESG on financial activities has gradually evolved from being marginalized in the past to being recognized by more and more mainstream thinking.
Global climate change is closely related to investment activities
In recent years, green bond investment has experienced significant growth, but different scenarios for addressing climate change have varying impacts on equity investment opportunities. If all investment activities such as coal-fired power and thermal power generation are implemented without restrictions, the global temperature forecast will rise by 4 degrees; But if all countries implement their promised 'nationally determined contributions', it means that 15% of existing investment activities will have to stop; If we want to achieve the temperature control target of 2 degrees Celsius under the Paris Agreement, 60% of the existing global investment plans need to exclude high carbon emission projects.
So,Climate change and environmental change have a significant impact on investment activities.Dr. Shi presented four different forms of ESG investment, including negative exclusion methods for socially responsible investment, incorporating ESG principles into investment decisions, using shareholder actions by ESG investors to intervene in decision-making, and impact investing.
Regarding the ESG investment return rate that everyone is concerned about, Dr. Shi said that for impact investing, the investment return rate is generally lower than that of conventional investment, but from mainstream stock indices, ESG investment returns are showing an increasingly high trend. In recent years, the rise of ESG investors intervening in the decision-making of their investment companies as shareholders is the latest trend in ESG development. Studies have shown that the return rate of this ESG investment is also higher than that of investment models that do not pay attention to ESG. The probability of investment returns that are included in ESG criteria being higher than those of conventional investments that do not consider ESG is 63%.
Enterprises should attach importance to ESG information disclosure
Dr. Shi Han also pointed out in the lecture that ESG information disclosure will become increasingly important for enterprises, not only attracting investment and improving operational efficiency, but also helping enterprises resist risks. However, the current situation is that over 40% of China's top 500 companies have never released a social responsibility report. Enterprises, governments, investors, and rating agencies will gradually require companies to display ESG related data that is as authentic and high-quality as financial data.
In addition, Dr. Shi also introduced five different types of green supply chain actions that have been deeply practiced in China, including green supply chain pilot demonstration led by the Ministry of Industry and Information Technology and other governments, green supply chain actions led by multinational companies such as Shanghai GM, Wal Mart, IKEA and Apple, green supply chain actions led by environmental non-governmental organizations such as the Public Environment Center, green supply chain actions led by industrial organizations such as China City Alliance and the Real Estate Chamber of Commerce, and sustainable supply chain management based on global ESG rating platforms such as EcoVadis and CDP.
In view of the fact that climate change poses a greater threat to human survival than the current COVID-19, global ESG development increasingly places enterprises' response to climate change at the center. By implementing a series of management frameworks and methods, including Climate Related Financial Disclosures (TCFD), Scientific Carbon Targets (SBT), CDP, etc., to assist companies in effectively assessing the transition risks caused by regulatory and policy changes due to climate change, as well as the impact of physical risks such as extreme weather events on their business development from the outside to the mainland; At the same time, enterprises are required to develop corresponding governance structures, development strategies, management processes, and key performance indicators from the inside out to control the increasingly serious risks caused by climate change and seize emerging business opportunities.
After the wonderful lecture, the on-site students asked Dr. Shi Han questions about the practical application of ESG, enterprise management, and industry development trends under the prospect of carbon neutrality. There was a lively interaction between the teachers and students. This lecture focuses on hot topics such as social responsibility and carbon neutrality, and conducts in-depth analysis based on the business practices of enterprises and future market opportunities, outlining a development landscape of ESG enterprises full of opportunities and challenges for everyone.