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With the hot discussion of " carbon peak " and "carbon neutrality", ESG investment has become the focus of the financial market.
ESG contains three levels of evaluation indicators: environment, society and governance, and aims to quantify the non- financial risks of company assets . ESG's starting point in China was that in 2018, MSCI announced that it would include A shares in the emerging market index. Since then, ESG's investment enthusiasm has continued to heat up, and regulatory departments, listed companies, rating companies and investment institutions have responded positively to this.
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At present, the global financial market has gradually formed a complete ESG investment ecosystem including investment concepts, regulatory policies, information disclosure, rating systems and investment practices. However, there are still many discussions and controversies regarding ESG disclosure standards, as well as its impact on financial markets, how to affect asset prices and valuations, and its role in responding to climate change in achieving carbon emission reduction.
For this reason, a reporter from " Daily Economic News " (hereinafter referred to as NBD) talks with Brian Scott-Quinn, the chairman and director of the Financial Market Banking Program at the ICMA Center, Henry Business School of Reading University, and an invited member of the High-Level Expert Group on Sustainable Finance in EU (EU).
ESG investment is far from on track
NBD: In recent years, problems such as the continued global epidemic, climate change, and energy shortage have become increasingly prominent, making the ESG concept a consensus on green transformation, emission reduction and carbon reduction, and sustainable development of the global economy. How do you view the importance of ESG-related discussions in financial markets?
Brian Scott-Quinn: Actually, I doubt whether there is a consensus on the green transformation of the global economy today. In some ways, new high-carbon exploration projects continue to advance due to the shortage of European oil and gas products, and we have been backwards. As far as ESG impacts on financial markets are concerned, there is now a lot of "noise" and many funds or companies claim to be green on their own. But in practice, most of them are "green washing", that is, a company or fund claims to be green, but if it explores its green claims in more detail, the result is not true.
NBD: In terms of ESG standards, dozens of ESG-related information disclosure systems have been formed internationally. Mainstream standards include GRI, SASB, TCFD, IIRC, CDP standards, etc. At present, ISSB has announced that it will develop a high-quality, sustainable global benchmark disclosure standard to provide investors and capital markets with information on the risks and opportunities related to corporate sustainability, covering three important ESG issues. Do you think it is important to develop a common ESG framework? Why?
Brian Scott-Quinn: Just as we have internationally stipulated for traditional accounting reports, it is of course important to formulate unified rules. Otherwise, companies and funds can set their own rules so that they can claim they are green when it is not. Therefore, the standards set by the ISSB are absolutely crucial to achieving the goal of reducing greenhouse gas emissions, because global greenhouse gas emissions continue to rise every year. We cannot achieve sustainable development without significantly increasing financing for sustainable assets and ESG assets.
NBD: If there is a global framework for ESG disclosure standards, what do you think is the biggest challenge in designing and implementing such standards?
Brian Scott-Quinn: The biggest challenge is still the lack of data and poor data quality. We cannot obtain useful ESG disclosures without agreement on the required data and investment in detailed data collection infrastructure. The data must be very detailed so that companies can understand the true ESG characteristics of each factory they own or purchase around the world.
NBD: At present, what is the current development status of ESG investment in the global financial market? What problems and challenges have you encountered? What impact does ESG investment have on the financial market?
Brian Scott-Quinn: I would say that ESG has very limited impact on the financial markets in terms of financing the huge growth in the supply of real assets, including wind, solar, nuclear and synthetic fuels, hydrogen production, direct air carbon capture (DACC), and electric and hydrogen vehicles. Globally, we are far from on track to fund the huge growth in new truly sustainable asset investments.This is necessary to prevent the world from becoming increasingly uninhabitable for humans, animals and plants.
E, S and G ratings make more sense
NBD: For financial institutions, what is the important role of financial institutions in responding to climate change? How to contribute to climate change response through ESG disclosure and achieve emission reduction and carbon reduction?
Brian Scott-Quinn: For financial institutions, what is needed is that funds sell their high carbon assets less to achieve "green", while companies invest more in new physical assets . As far as oil and gas companies are concerned, they currently invest only about 10% of the annual investment budget in clean energy…if they do not increase this proportion quickly, there is not enough funding to achieve a successful energy transformation. At present, ESG disclosure is not as important as investment company and funds in real investment in new real clean assets.
NBD: You have provided strategic advice to many international banks on the ESG issue. I know that you have rich working experience in banking institutions and financial regulatory departments. Can you share your suggestions on banking ESG investment?
Brian Scott-Quinn: Based on my work experience, unfortunately banks and investors have to rely on disclosures made by the company, which in turn rely on data collectors who can get the data they need. Before that, banks and investors were actually just speculating whether a company is truly environmentally friendly and green.
In addition, rating agency stopped publishing "ESG" ratings, and it would be more meaningful to publish E, S and G ratings respectively. Each of these is looking at a very different aspect of the company’s behavior. Combining these factors together for a single rating is like adding apple , plums and oranges together and being told that a store only sells "bag fruits", but the proportions may vary from store to store. Currently, each ESG rating company has its own preference ratio between E, S and G. For example, a rating company rated Tesla very low because it has poor ratings on S and G, and it rated ExxonMobil relatively high because it outperforms other oil and gas companies. Therefore, the rating is actually relative to other companies in the industry.
It's like a fruit sales company tells you that although many of its plums rot, they rot less than competitors' plums, so they all have high ratings.
NBD: If countries are to achieve their greenhouse gas emission reduction targets, what areas do you think are crucial to decarbonization? Regarding the ESG issues of capital markets and listed companies, which companies do you think need to issue ESG reports?
Brian Scott-Quinn: Of course, the answer is all departments. But it is mainly energy, transportation, agro-food and forest products, materials, construction and construction. All "large" companies should be required to submit ESG reports.
NBD: According to your research, how do companies view ESG reports? How to judge the quality of corporate ESG disclosures? How do investors identify real ESG companies?
Brian Scott-Quinn: Identifying real ESG companies requires a lot of knowledge and understanding, and the only way to do this is probably to read a detailed study of NGO (NGO), which try to discover the truth about individual companies.
IPR or affect asset valuation
NBD: The impact of physical damage caused by climate change, as well as potential changes in regulations and technologies, how do these factors affect company performance? In addition to environment [E], according to your research, the "S" in E S is becoming increasingly important. What are the main influencing factors of [S], and how does [S] affect the profitability and financial performance of a company?
Brian Scott-Quinn: Environment [E], I prefer the EU approach, which is a "dual" perspective - the company's impact on the environment and the impact on the company, which covers E and S. S is essentially about equality and fairness. Therefore, men and women should treat equally in terms of wages, etc., and different ethnic groups should treat equally. Furthermore, child labour is considered unacceptable.
NBD: Has ESG investment already had an impact on the company's asset value, and will it become one of the important indicators of company valuation in the future?
Brian Scott-Quinn: If high-emission companies do not respond to the growing damage caused by climate change by reducing emissions, and financial companies do not reduce their investment in these companies or increase their investment in new clean assets, the risks they face come from what is known as the "Inevitable Policy Response" (IPR). This is an almost inevitable response from governments and regulators, and it can have costly effects for companies that have not taken climate risks particularly seriously by then. As far as banks and investors are concerned, they may find their portfolios holding many wrongly priced (overpriced) loans, bonds, and stocks, putting them at huge portfolio risks. In addition, there may be more litigation cases against non-sustainable companies.
NBD: In your book Business and Investment Banking and International Credit and Capital Markets: A Guide to Global Finance and Its Governance, you discuss financing and investment opportunities for the clean energy transition. I know you are a financing consultant for Penultimate Power UK Ltd (small modular reactor, also known as SMR). Can you describe the current situation and prospects of SMR and hydrogen energy investment?
Brian Scott-Quinn: SMR, or rather, advanced nuclear technology , is just beginning to start, and China is the only country running this reactor . The United States and Canada are lagging behind a few years, but are likely to catch up. By 2030, I think they will start to have an impact on the energy market (heat and electricity).
The development of hydrogen is very fast, but it is still limited by the speed of electrolytic plants upgrading and the speed of pipeline transportation expansion.
NBD: In achieving the Sustainable Development Goals , China has made a clear "dual carbon" commitment, which has increased the popularity of ESG in China. How do you view China's participation and contribution in promoting the development of ESG? What impact may it have on progress in the global ESG field?
Brian Scott-Quinn: To fulfill its commitment, China's state-owned utility has promised to invest heavily in solar and wind energy during the 14th Five-Year Plan period... It has more renewable energy than any other country and a huge and growing nuclear power capacity. Of course, it is also the largest solar panel manufacturer. But the problem is that it is still the largest consumer of coal, and it will take many years to eliminate this.
NBD: How do you view the ESG disclosure of Chinese financial institutions, especially banks and listed companies, and what are the shortcomings?
Brian Scott-Quinn: I don't think I have enough information to answer this question. But it is certain that large state-owned banks remain large financing providers of coal and other fossil fuels, so they are major contributors to “financing emissions” and “climate financing.” Brian Scott-Quinn Introduction:
University finance scholar, founder and chairman of the ICMA Center of the International Capital Markets Association, professor of banking and fintech . He is also a non-executive director (NED) and entrepreneur. He offers executive education courses focused on banking and fintech as well as infrastructure/real estate financing and institutional investment, including the topic “Energy Transformation – The Role of Banking and Asset Management Company in Climate Change Mitigation”.
Early in his career, he worked in asset management, corporate loans, investment banking and debt capital markets, with early consulting work including: Westpac (establishing investment banking sector), NM Rothschild (establishing a new trade sector), Canadian Life Insurance (inquiry on its proposed investment in structured assets [CDO]), Australian Co-public Provident Fund (AMP) (advising on the construction of a new UK asset management department to serve third-party clients), Dubai Shuoya Capital (building a new IT system for asset management, equity IPO and trading), London Stock Exchange (new technology consultant for internal teams), SWX Europe (member of the Trade Point Market Advisory Group), Dubai Stock Exchange and DIFX (strategic advisor to board member Dr. Osama El Ansari), etc.
1978/1979, he served as the first Minister of Finance of Margaret Thatcher, Lord Abella Onhoe (Jeffrey Howe), to monetary policy . At the same time, he is also a member of the Secondary Bond Market Transparency Industry Working Group of the Financial Services Administration (FSA). Invited member of the European Union (EU) High-level Expert Group on Sustainable Finance.
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