In recent years, “environmental, social and governance” (ESG) has set the new gold standard for corporate leadership. As of July 1, 2020, ESG reporting has also become mandatory for listed companies in Hong Kong, heightening the importance of corporate leadership on tackling environmental issues, improving society and maintaining high governance standards.
ESG is a reporting framework for corporations to outline their work and the subsequent impact on environmental, social, and governance aspects. Initiated from the call to consider ESG factors in marketing and investment decisions, it now serves as assessment standards for investors to understand companies’ principles, objectives and management strategies, and select worthy ones for investment, unlike “corporate social responsibility” models.
Driven by its appeal to more than half of asset owners who reported implementing or evaluating ESG considerations in their investment strategy, ESG investing is gaining momentum globally. Studies last year show doubling flows into ESG funds in just one year, and by 2030, ESG assets could hit the $30 trillion mark. Stocks of green-minded companies are also found to deliver better investment returns, allowing up to 7 percent more annual returns than other stocks, and nearly 30 percent fewer investment risks, demonstrating how corporations harnessing ESG have higher resilience against market volatility.
But is ESG relevant to listed companies only? What are the incentives other than compliance obligations for companies to harness ESG in Hong Kong?
ESG is relevant to companies of any size as it reinforces a long-standing positive corporate reputation attracting loyal consumers and top talents, apart from providing financing and investment benefits. Surveys reveal that two-thirds of consumers support green-minded companies, and are even willing to pay 25 percent more for sustainable products. Sustainable practices of companies are also the second-highest reason for high customer return rates, which gives corporations economic gains, for there exists a 10 percent reduction in marketing costs for every 2 percent increase in customer retention, and also helps companies save the five-times-higher costs for attracting new consumers. Meanwhile, studies found that 1 in 3 employees prefer working in companies genuinely working for ESG initiatives, implying that companies with strong ESG values also enjoy an overall increased level of productivity and employee loyalty.
ESG should be more than a reporting framework. High ESG standards also enable company operations to be more sustainable, encountering fewer ad hoc crises, further minimizing unnecessary company expenditures and investment risks. A survey titled ESG Investing: Challenges and Opportunities for Hong Kong, by the Hong Kong Trade Development Council this year, shows over one-third of respondents seeing the importance of ESG in influencing long-term company operations and reputations, and over half expressed concern for the corporations’ potential in business opportunities and client retention should they not have utilized ESG.
Offering ESG solutions itself is also a lucrative business. Take environmental solutions as an example: Following the pledge of the central government in 2020 to become carbon neutral by 2060, the heightened urgency and importance for energy transition implies the need for the development of China’s green finance industry. Research from Tsinghua University’s Institute for Climate Change and Sustainable Development found that strengthening and advancing the energy systems from 2020 to 2050 alone would require a new investment of almost 138 trillion yuan ($20.54 trillion), meaning more than 2.5 percent of China’s annual GDP. Such high demand on energy transition presents a multitrillion-dollar business opportunity for companies to capitalize on providing energy innovations, sustainable financing solutions and other business offerings.
Hong Kong is already at an advantage as an integral part of the Guangdong-Hong Kong-Macao Greater Bay Area and an international financial center, holding the strategic position of China’s global financial market gateway for funds flowing into and out of the Chinese mainland. Hong Kong Exchanges and Clearing (HKEX) and the Guangzhou Futures Exchange have signed an agreement for developing carbon emissions futures products, demonstrating the potential for our development of green finance and an increase in our competitiveness, catching up with the United States and the European Union in this regard. Leveraging on the synergies between the Chinese mainland and Hong Kong, there could be an exchange in expertise and know-how on green financing; and financial institutions in Hong Kong are in a good position to develop sophisticated products around green finance.
Though still at its initial stage of development, ESG already shows promises of a multitrillion-dollar opportunity for businesses. Companies should approach ESG more than just for reporting but integrating ESG into business operations and communicate the firms’ ESG initiatives to other stakeholders authentically, demonstrating their actual execution of ESG practices and avoiding misunderstandings of “greenwashing”. As James Giffen, the originator of the term ESG put it, “ESG is a journey we are all on together. If all goes well. We will never reach the destination, as over time it will become integral to everything we do.” A successful ESG strategy will reap dividends for companies in the long term.
The author is the co-founder of Brianstorm Content & Brandstorm Communications and co-author of Six Future Skills You Should Learn Now.
The views do not necessarily reflect those of China Daily.