The English version is AI translated.


12.2021 Life Guide

Investment in ESG financial management is not ng

Far Eastern International Bank / Ji Congfan
        ESG has fully occupied the attention of investors all over the world and launched the global enterprise elimination war. For Taiwan investors, ESG has become a super hot topic under the strong promotion of the financial supervision commission. This issue of "finance column" will take you to deeply understand this new mainstream of investment!

        What is ESG?

        ESG is an English acronym for environmental, social and governance. Among them, "environmental" includes: energy use management, waste management, climate risk, natural resource scarcity, pollution and waste and other environmental related contents; "social" Including: labor issues, information security, product liability, risk benefits or employee health and safety management, marketing management, asset security privacy protection, etc; "Governance" covers various issues of corporate governance and behavior, such as the quality and effectiveness of the board of directors, risk management, business ethics, supply chain management, etc.

        ESG is usually mixed with the term "sustainable investment" or common to each other. In fact, sustainable investment is an overall concept, and ESG is a data analysis tool used to identify and formulate specific sustainable investment plans. ESG scores are usually classified as "non accounting" information, Because it reflects the factors that are not disclosed in traditional reports but are very important to valuation. With the increasing complexity of factors affecting enterprise evaluation, the influence of intangible assets is increasing. ESG score can measure the management's decisions affecting operational efficiency and future strategic direction, as well as the status of intangible assets such as brand value and reputation.

        What is the ESG score? Can it be considered for buying stocks?

        In recent years, more and more investors around the world have measured the social responsibility performance of an enterprise through ESG score, believing that this score can estimate the external risk of the enterprise and see its future performance.

        In the past, when we invested in a stock, we often observed whether the company's financial constitution was sound and whether its profits were good from the financial report data, but if the company falsified the data in order to make the financial report look good, Even the use of bad raw materials (such as food safety problems of food companies) will lead to significant fluctuations in the stock price, but investors can't see the clue through the financial report data until the fraud is revealed.

        In addition to moral demands, ESG also represents corporate social responsibility. A company's basic responsibility is to help shareholders make money, but it must also contribute to social and environmental sustainability development in order to gain market recognition, and investors are more willing to hold this stock for a long time. ESG measures a company's corporate social responsibility score as a reference for investors to select shares.

        How to compare ESG scores?

        ESG marks a company according to the indicators of environment, society and corporate governance after being evaluated by professional institutions. Common ESG evaluation index institutions in the world include S & P Dow Jones Indexes (S & P DJI), Morgan Stanley Capital International Index (MSci) and FTSE Russell (FTSE Russell), etc. these companies will provide ESG scoring reports to major investment institutions for reference, and each institution will measure the ESG scores of each stock according to the self-built scoring mechanism. For example, MSCI is one of the world's largest financial information services companies and an enterprise compiling global financial related indexes. It has long cultivated ESG research and is currently working in ESG Its research scope covers about 8500 enterprises around the world. In addition to giving ESG ratings to individual enterprises, it also launched ESG index series.

        How to calculate the rating of MSCI ESG? It mainly uses the three aspects of environment, society and corporate governance to evaluate the ESG performance of an enterprise. Under these three aspects, there are 10 related themes and 35 corresponding key indicators, such as carbon emission, water resources utilization and waste treatment. Then, according to the industry of each enterprise, each key indicator is given different weights, and then the scores are calculated and rated. For public utilities, carbon emission is an important key indicator; But for the financial industry, corruption and business ethics are more important.

        MSCI ESG rating is finally divided into 7 grades, from high to low, respectively AAA, AA, a, BBB, BB, B and CCC. A rating above AA indicates that the company's ESG performance in the same industry is "leading"; A rating between a and BB indicates that its ESG performance is "average"; If the ESG rating is B to CCC, it means that the company's ESG performance in the same industry is "backward".

        At present, MSCI ESG rating covers about 120 enterprises in Taiwan, among which TSMC (stock code 2330) is the only Taiwan company with AAA ESG rating. Investors can directly enter the stock code on MSCI's official website to query whether each company has obtained MSCI ESG rating and the rating content.

        In short, ESG can be regarded as a risk assessment to assess the external risks of the enterprise. If the company's revenue growth rate is very high, but it is achieved by squeezing labor and polluting the environment, the ESG score will be very low. Generally speaking, stocks with low ESG score have poor performance, while those with high ESG score are expected to obtain a more stable return on long-term investment.

        How can ESG scores help companies push up stock prices?

        The factors affecting the growth of the company's share price are quite complex, but in fact there are no more than two key points: "reducing costs" and "improving revenue". How can ESG help enterprises achieve these two goals?

        1. Cost reduction:

        As more and more investors hope to invest their funds in enterprises with ESG, enterprises with good ESG performance are easier to obtain funds than those with poor performance. This situation occurs not only in the stock market, but also in the loan market.

        In 2017, two Dutch enterprises signed a loan agreement of 1 billion euros, and the loan interest rate is changed according to the ESG rating given by a third-party agency. In other words, if the ESG rating of the enterprise increases the next year, the loan interest rate will be reduced, thereby reducing its capital cost. In recent years, similar green finance trends are spreading at home and abroad. Taking the green finance action plan 2.0 launched by the financial supervision commission last year as an example, one of the core ideas is to hope that financial institutions can guide enterprises to pay attention to climate change and ESG issues and take relevant measures through lending and investment.

        2. Increase revenue:

        When the growth of the company encounters a bottleneck, we can also think about how to solve the problem from the perspective of ESG. In terms of "environmental aspects", some enterprises will increase operational efficiency by establishing sewage management systems, environmental management systems and other equipment; Or start from the "social aspect". Take some Silicon Valley technology companies as examples, they often invest considerable resources to retain good talents. According to the research results, once employees are valued and think their work is meaningful, the average productivity will increase by up to five times. Therefore, the investment of enterprises in ESG field can effectively improve the long-term operation efficiency, and then improve the revenue target.

        ESG attracts both eyes and gold, but it still doesn't keep up with the tide?

        During the period of COVID-19, the net outflow of the global fund exceeded US $380 billion, but the ESG sustainable fund was sought after by investors, with a net inflow of over US $46 billion. According to Fitch Ratings' survey on Taiwan's investment trust industry in the fourth quarter of 2020, about 15% of the newly launched funds have a clear ESG investment strategy, which is significantly higher than that in previous years. Moreover, about 90% of the operators attach great importance to ESG factors and have planned or are planning to adopt the principle of responsible investment.

        Some enterprises in Taiwan have also been committed to practicing ESG goals for a long time, such as TSMC, which is familiar to everyone, and large-scale procurement of renewable energy power such as offshore wind power and solar photovoltaic. In addition to fulfilling their commitment to environmental sustainability, it also helps to promote Taiwan's renewable energy industry. In addition, by relying on the wastewater recovery and rainwater storage system, the group innovation of large scientific and technological factories can improve the water utilization rate. A drop of water can be used at least four times. In addition to doing well in their own business, these enterprises also comply with the spirit of ESG's sustainable operation and environmental maintenance, so as to win the favor of investors.

        High quality investment strategy ESG Chengxin learning

        Former US Vice President Goyle, who strongly advocated ESG investment guidelines, once said, "if investors are unwilling to admit this new fact (referring to ESG investment), it is tantamount to throwing money out unprepared." When formulating investment strategies, taking ESG factors into account is not only from the standpoint of "ethics" or "value", but also a more comprehensive understanding of the risks hidden behind enterprise operations, which helps to reduce investment risks.

        For example, if you invest in a company with low ESG standards, the portfolio may be affected by various risks faced by the company in the future, such as strikes, lawsuits and negative publicity, which will drag down future returns. In addition to financial analysis, investment institutions also pay more and more attention to the investment risk derived from non-financial factors such as ESG. According to statistics, during the epidemic period, the performance of funds focusing on ESG index is not only better than the market, but also more resistant to decline, making ESG investment more valued by the market.


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