The pandemic accelerates the interconnectedness between sustainability and the financial market, with responsible investing being on the trajectory to the mainstream. Experiencing the high vulnerability of the economy to global crises and social unrest, investors are proactively incorporating Environment, Social and Governance (ESG) factors into their investment analysis to gain a more holistic view of companies’ material risks, expected growth opportunities, and profit margin.
As reported by the CFA Institute, 85% of its members are now taking at least one of the E, S or G factors in investment decisions; meanwhile, 76% of institutional investors and 69% of retail investors have reflected an interest in ESG investing, demonstrating ESG considerations have become an integral part of the asset management framework.
ESG factors represent one of the fundamental components in determining the long-term prospects and financial performance of a firm. For example, high-emitting companies may suffer from a higher operating cost in combating carbon emissions in the face of the tightened environmental regulations. In general, better ESG performing companies are associated with lower risks and higher returns, which can be reflected in the company’s value. Hence, establishing a systematic approach to integrate ESG factors into fair value calculation is of paramount importance for optimizing investment strategy.
Unlocking ESG Opportunities
Highlights in the Report:
- Companies with strong ESG propositions are usually associated with higher long-term sustainable growth and credit ratings, along with lower volatility.
- There is a positive relationship between the ESG disclosure score and P/B ratios. When the ESG disclosure score increases by 20 units, P/B ratios approximately rise 0.13 accordingly, within the Hong Kong-listed real estate developer sector as of October 2021.
- Material ESG factors have an explicit impact on companies’ free cash flow adjustments, influencing the operating revenues, capital expenditures and taxes, etc.
- ESG performance is closely intertwined with the discount rate, which a risk premium is applied when companies score poorly in ESG metrics, resulting in a lower present value.