Financials Author: Sasha Chen Mar 26, 2022 09:00 AM (GMT+8)

Environmental, social, and governance (ESG) investments have gone viral in corporate enterprises around the world, following the European Union’s net-zero goal of achieving climate neutrality by 2050. An ironclad commitment to reducing carbon emissions and becoming net-zero is also stamped in China’s 2060 datebook. ESG fanatics are now starting a long recap journey of learning from the past and sharpening their points of view.

ESG

From Invisible to Measurable

The ESG world is never driven by the sheer joy of winning the battle for public trust by bloating promises. Instead, it has a gatekeeper importing standardized evaluation - ESG metrics. They are standalone numerical values in greenhouse gas emissions, social issues, and governance for enterprises. These data are vital for calculating whether corporate enterprises keep their words to be accountable and transparent in these three scopes of responsibility. Drawing attention to only one scope can decrease the enterprise's ESG rating when their disclosure of data will capture any weaknesses in the company's management. 

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Some examples of ESG metrics come along with the carbon intensity score in invisible CO2 and methane emissions. Peter Perri, the executive director of Energy Media, also serves as an investment banker at the Sustainable Energy and Infrastructure Group at Young America Capital. He entered the energy industry in 2011 when the industry was still traditional and hadn't changed over the years. Starting from the pandemic, he recognized that the world has been working together progressively in ESG initiatives and the numerical standards can determine a measurable value to an enterprise's environmental impact.

In the branch of overall ESG appliances, Perri believes that next-generation fuels, including blue hydrogen and biogas, are critical parts of the puzzle because of their fast transmissibility and ability to be deployed in mass production similar to natural gas. The carbon intensity score, therefore, facilitates an irreplaceable role within this spectrum.

"We are working on a USD 700 million hydrogen project in Pennsylvania. In the current market, blue hydrogen has the most near-term promise," said Perri, "The carbon intensity score can look over the entire lifecycle of the process and helps to determine a more measurable value to the fuel."

How to label the invisible emissions pave the way for differentiating scopes, according to the GHG Protocol Corporate Standard. As listed, there are a total of three scopes, of which scope 1 and 2 are mandatory to report whereas scope 3 is voluntary. The scope 3 emission refers to the indirect release of greenhouse gas emissions from supply chains both upstream and downstream.

For instance, upstream activities, like business travel and employee commuting, are included in the scope 3 emissions. By drawing the outlook of ESG, fuel, and energy-related activities have been spotlights in this field. In contrast, the emissions relating to the production of fuels and energy purchased and consumed are also part of scope 3.  In short, to accurately measure the scope 3 emissions, there are still existing challenges in monitoring and acquiring precise data.

A New Gold Rush in Finance

There is always a reason why ESG trends are becoming more popular than ever. The answer is quite straightforward – there are stacks of piling money from the deep-pocketed investors and affiliations that are waiting for enterprises to carve out.  This lucrative business is a feast for global enterprises alongside appetizers of gaining environmental and social benefits.

With pressing climate issues, the green part of ESG practices related to the environment has outstripped the other two scopes. According to the United Nations Environment Programme (UNEP) report, the cost of adapting to climate change in developing countries could rise to between $280 and $500 billion per year by 2050.

Nowadays, ESG criteria are commonly an important indicator in an investment. There are six methods for investors to bring ESG considerations into their decision making – exclusionary screening, best-in-class selection, thematic investing, active ownership, impact investing, and ESG integration.

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In the light of ESG investments, Perri said that the U.S. asset allocators, such as Bridgewater Associates and BlackRock, have led the world in financial innovations by using their scale to drive change. For instance, BlackRock's assets under management jumped past USD 7 trillion. The CEO of BlackRock Larry Fink also outlined that ESG is included as an important metric for their asset allocation.

With a background in e-commerce and digital media back in the 90s, Perri has witnessed the explosion of the Internet and digital technologies through that time. Without the integration with the Internet and digital technologies in the financial industry, the energy industry in the ESG scope would move much slower and take decades due to a lack of efficiency.

"ESG as a trend has been rapidly expanding," said Perri, "Because of advances in FinTech, like ESG measurement and reporting, progress can be tracked. The core difference between now and the past is ESG metrics that are driven by the financial sector."

China's ESG: Intertwined with Global Relations

In China, the country has made an oath to achieve carbon neutrality by 2060. The next four decades are a long path marking the realization of any green dreams. To echo this ambitious action, the e-commerce behemoth Alibaba Group has poured money into taking ESG solutions as part of their decision making. The major index provider MSCI recently upgraded Alibaba Group's healthcare affiliate Alibaba Health's ESG rating from BBB to A in March 2022. The company also has partnered with the Chinese central government to improve the county-level healthcare systems by addressing health issues of the poor population and devoting to campaigns such as Global Drug Search Alliance.

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In 2018, the People's Bank of China took the lead in establishing the Green Finance Team at the China Financial Standards Technical Committee to ensure clarity and enforcement in supporting environmental equity financing instruments. By that time, the committee amended 3 approved agreements and 15 ongoing proposals in various key areas, such as ESG evaluation and carbon level tracker.

Following the state initiatives, in the following year, around 85% of China's leading CSI 300 companies released their official ESG disclosures to push a green wave, which was a rapid growth from 54% in 2013. That being said, China's market is poised to adopt the low-carbon economy transition

By the end of 2021, China's green loan balance accounted for CNY 15.9 trillion, up 33% YoY, ranking first of stock size in the world. The domestic green bond issuance exceeded CNY 600 billion, with a YoY increase of 180% over the last year. Perri has shown optimistic views of China's growth potential in ESG practices.

In terms of the national-level ESG development in China, the country has released a joint declaration pledging with the U.S. at the COP26 climate conference in 2021. The pledge focused on both countries' initiatives to combat and address climate change issues over the next decade. As two of the most greenhouse gas emitters in the world, the U.S. and China established a statement that also reflects a strong tendency of leading the world with a common ESG goal - less greenhouse gas emissions and battle the pressing climate change crisis.

"Many great financial innovations came from China and other countries in Europe. I do see that the trend is happening globally. I think that the U.S. has to be mindful that China is earlier in the emergence of its growth curve as China is rapidly modernizing," commented Perri.

Perri said that the bilateral collaboration should emphasize the need of pushing ESG trends in the global economy. Perri indicated that U.S. and China are the two largest economies in the world and will be at the forefront of adopting new approaches in ESG innovations.

He said, "The U.S. and China have to be unified and going in the same direction in ESG and the goals in leading the world in a positive way, which will suit everybody's best interest."

In a Nutshell

ESG practices are echoing the public needs of improving environmental issues, social and governance structures of corporate enterprises. This trend is ramping over the world, including the emerging and fast-developing economies like China, as a result of national incentive and expansion of investment scales. But more innovations are expected to be created in terms of the dynamic needs of the market and to calculate ESG metrics more accurately and estimate the cost of achieving net-zero goals in the world.