DDN Business Insider | Enabling Tomorrow: ESG, high-quality development and fintech

Editor's note: Last year, Ta Kung Wen Wei Media Group (TKWW), together with China Certification & Inspection Group, the University of Hong Kong's China Business School, and Peking University's HSBC Institute for Financial Research, established the Hong Kong International ESG Alliance and organized the first "Hong Kong ESG Ranking Annual Awards" event. More than 40 listed companies and financial service institutions were awarded. Recently, a seminar on ESG and high-quality development was held. Following is the transcript of the seminar.

【Anchor】Hello everyone, welcome to DDN Business Insider. I am Yunfei Zhang. I am here to bring a Midas touch to the Hong Kong Market. In today's society, the ESG concept remains hotly debated. Environmental, social, and governance (ESG) is a key issue for both corporate sustainability and investors. Some companies and investors, however, only think of ESG as a marketing concept rather than a practical concern for sustainable development. Will this make ESG a false proposition? Shi Yichen, the associate dean of the International Institute of Green Finance of the Central University of Finance and Economics and the chief economist of the China Green Index, emphasized that the strong performance of the "New Three Pillars" (electric vehicles, lithium batteries, and solar cells) supported China's export figures last year, which clearly demonstrates the importance of ESG in the global supply chain. ESG development is an intrinsic drive for realizing high-quality development and stimulating new quality productive forces.

【Shi】How to integrate climate change with green development is an important issue for us now. When you can integrate them, it (ESG) will not be a false proposition. The "New Three Pillars" have already demonstrated how to find opportunities through green development and climate change. That is to say, if we didn't have the "New Three Pillars", last year's export figures could have been even worse.

So in this process, for enterprises that are facing this so-called climate change, or the entire global supply chain restructuring, ESG is a very important standard or a license (for entry). In the global supply chain, if you don't pay attention to ESG, you may not receive orders.

Of course, you may ask why the world, including China, is talking about ESG or climate change.

Since I have a background in economics, I would like to share my thoughts on this issue from an economic perspective. Why has the country been talking about high-quality development for the past decade, from the initial supply-side structural reform to high-quality development, and to the current new quality productivity forces? Some people ask me what are the new quality productivity forces. I said it is the same as high-quality development, that "new quality" is "high quality". We need to think about why we develop in this direction. Nowadays, the world, including China, faces a key issue supply is greater than demand. That is what we say in economics, the aggregate supply is greater than the aggregate demand. Moreover, China's own production capacity not only meets our domestic demand but also satisfies global demand. At our current production capacity, if we don't have enough export orders, we will have overcapacity that we cannot digest. From an economic perspective, if supply is greater than demand, there are two strategies. First, reduce prices, or price competition. That is why we see Pinduoduo's market capitalization is higher than that of Alibaba. In fact, this may not be good for the overall economic development. Second, high-quality development. That is when we have higher quality at the same price level, then we will be able to win the orders. If my products have higher quality, I can even raise prices. In this process, we must have new breakthroughs from the economic model that China has developed in the past. Otherwise, we will fall into the West's prediction of China, which is the middle-income trap.

【Anchor】It has been 20 years since the concept of ESG was introduced by the United Nations Global Compact in 2004. Zhu Jiaming, Chairman of the Academic and Technical Committee of Hengqin Digital Finance Institute, pointed out that the roles of Mainland China and Hong Kong in the development of ESG have fundamentally changed in 2024. The concept of ESG is no longer a driver of transformation. It also requires transformation itself.

【Zhu】It has been a difficult process for the ESG concept to be introduced, accepted, popularized, and incorporated into the accounting system. During the last 20 years, we could see that China's role in the (ESG) world has become increasingly important. In Particular, we have made our position clear in the context of consortium collaboration. In 2020, China raised the "dual-carbon" goals. With this context established, it becomes very easy to understand Hong Kong's position and potential in ESG. So I want to explain it clearly from this perspective. ESG is a real concept, a developing concept, and an ever-expanding concept.

In the context of 2024, what are some new characteristics of ESG? To a certain extent, I also would echo and support Professor Shi's view. At this moment, four aspects have pointed out that ESG has entered into a new historical period, compared to when it was introduced 20 years ago. First, the guidelines on sustainability reports issued by the three major exchanges in China showed that ESG has entered the stage of mandatory disclosure. ESG has become a mandatory from a non-mandatory requirement in the past. This is a huge change.

Second, since last year or the year before, there has been a significant convergence between transition finance and the green financial system. (In the past) green finance only targeted green industries, excluding the issues related to carbon-intensive industries' transformation. Today we propose to include green finance in the integration of transition finance and ESG so that transition finance and sustainable development can become two aspects of the whole. This further proves that the concept of ESG has been expanded considerably. Third, biodiversity finance, including climate change, biodiversity, environmental pollution, etc. The interactions among these areas have also expanded the content of ESG and our understanding of financial support and financial resources behind ESG.

The 4th aspect and the most importantly, the combination of ESG, finance, and technology has become a three-way integration. It is quite different when we talk about the financial technology or fintech behind ESG, or the scientific and technological development today from what we meant twenty years ago. I would like to emphasize one concept in particular, now it should be ESG plus Finance, plus Science, and plus Technology. So it should be ESG plus F, S and T. We didn't know how important these were 20 years ago, but they are critical in today's society. All of these ultimately will face the challenge of dealing with massive and cross-disciplinary big data, which is different from how we understood big data before. 20 years ago, no one would have thought that ESG needed to be combined with AI. Now we realize that the development of AI offers a very broad technological prospect for ESG. Under these circumstances, ESG is facing a situation where it is promoting transformation and is itself undergoing transformation as well. The concept of ESG is enriching.=

【Anchor】ESG has gradually developed into a comprehensive evaluation system in the world. Li Jing, senior researcher at the Center for Green Finance Research, PBC School of Finance of Tsinghua University, pointed out that ESG is crucial in lowering corporate risks. She also said that requirements for ESG on the policy level are becoming more precise and are evolving continuously.

【Li】ESG is not a false proposition. It may, under certain circumstances, represent a cost. However, in some financial theoretical studies, we find that ESG can significantly help to reduce risk. This is my first point.

Secondly, I want to share our recent research and learnings regarding various industries. As Professor Shi pointed out, new energy, photovoltaic, wind energy, and new energy vehicles have become new growth drivers for us. But at the same time, we may not notice that there are actually great opportunities in some carbon-intensive industries in our country. When we talk about carbon-intensive industries, such as coal, electricity, steel, and cement, the first thing that comes to mind is that we emit the most carbon in the world. However, our country's carbon intensity is actually lower than the global average. The carbon intensity of steel production is much lower than the global average. That of the chemical industry is about 20% below the global average. The carbon intensity from extracting aluminum by electrolysis is slightly higher than the global average, but still within the average range. That of cement production is also slightly above average. So the carbon intensity of the chemical industry and steel industry are far below the global average. But the differences are not particularly big for the carbon intensity of other high-carbon industries when compared with the global average.

When we discuss with some corporations, we found that there is, on one hand, room for them to reduce carbon emissions. On the other, some international policies will also impact them. For example, there is CBAM, the EU'sCarbon Border Adjustment Mechanism that was imposed last year. There is also recently an EU regulation introduced on used battery recycling m, and the IRA, Inflation Reduction Act in the U.S.. In fact, all of these bills or policies are aimed at imposing restrictions on foreign imports through the "Environmental" aspect. Therefore, for these carbon-intensive industries or emerging industries in our country, on the one hand, there are a lot of opportunities. On the other hand, we actually face some restrictions in foreign trade policy for them to go international for business. Although (one may argue these policies) are to curb exports, even when we disregard these policies' motivation, the "Environmental" aspect of ESG has already become a very real issue for both carbon-intensive industries and new energy industries. We have such good industrial prospects, for example, advantages in new energy. In carbon-intensive industries, we also have more investment opportunities and overseas development opportunities than expected. But now we also face some policy restrictions. So from the industrial perspective, at least the "Environmental" aspect of ESG is not a false proposition. This is what I think is the current situation in the industry.

Third is to share with you the policy aspect. Like the policies just mentioned by the two experts, whether it is the IWSB, or the guidelines issued by the three major exchanges, in fact, before the formulation of the concept ESG, the Ministry of Ecology and Environment in our country already emphasized on environmental protection and implemented many policies. It is just the policies continue to evolve, from the "dual control of energy consumption" mechanism to the "dual control of carbon" mechanism, and from the initial TCFD to the IWSB. The global ESG requirements and our country's ESG requirements are growing, evolving, and becoming more precise.

【Anchor】For a long time, companies and practitioners have focused on the environmental and social aspects of ESG. Some people think that corporate governance should be the core of the ESG concept. Gao Minghua, Director of the Research Center for Corporate Governance and Enterprise Development at Beijing Normal University, Chief Expert of the Major Projects of the National Social Science Fund of China, Chairman of the China Corporate Governance Forum, and Assessment Expert of the Hong Kong International ESG Institute, has demonstrated the importance of corporate governance by reviewing the evolution of the "G20/OECD Principles of Corporate Governance".

【Gao】The "G20/OECD Principles of Corporate Governance" has been revised three times, from the first edition in 1998 to the 1st revision in 2004, then to the 2nd revision in 2015, and last in December 2023. I was involved in the last two revisions. There were chapters dedicated to the "environmental" aspect.

As I just mentioned, when the World Bank and the IMF came to assess the stability of China's financial sector and corporate governance, they also used the "G20/OECD Principles of Corporate Governance". This suggests that corporate governance already encompasses social responsibility. And with the concept ESG, we are actually narrowing down and going backward with the concept G, "governance".

Therefore, we need to discuss whether (specifying) the term "G" is still necessary. Of course, it is not unnecessary. When you separate out the "E" and "S", people will pay more attention to the "Environmental" and "Social" aspects, which is a good thing. At the same time, since people might not fully understand the concept of corporate governance, it is important that we highlight it. But if we emphasize the concept of "E" and "S" but ignore the "G", that's absolutely not right.

As I said earlier, many of those involved in ESG assessments nowadays are primarily from environmental protection or social responsibility departments. These individuals have a limited understanding of corporate governance, which has led to neglecting the "G", which is very undesirable. Wu Qing, the newly appointed Chairman of the China Securities Regulatory Commission, mentioned a concept in the Two Sessions: the core mission of the CSRC is investor protection, especially safeguarding the rights & interests of small and medium-sized investors. This is not one of the CSRC's core missions, but the only mission. What is this about? This is about corporate governance.

【Anchor】Speaking of the importance of corporate governance, Professor Zeng Cheng of Hong Kong Polytechnic University pointed out that the impact of corporate governance on company value is two-fold. He said that good governance can create value and contribute to the implementation of ESG standards.

【Professor Zeng】My research is mostly about accounting. In accounting, earnings management happens when a company has a very clear goal. For example, my company wants to go public, or it wants to refinance, or to raise the stock price to a certain level. I will conduct earnings management because there are clear goals. So the same logic applies when we talk about the CEO's green compensation. Once this target is written into his compensation, that the CEO must achieve a certain level of ESG performance to get the bonus, the CEO will have a very strong incentive to do greenwashing. That is to say that "governance" is like a double-edged sword. If you use it well, it will create value, and support other ESG pillars. But if you use it poorly, it may have a very negative impact on the value of the company. This is my view from an academic standpoint.

【Anchor】Nowadays, the ESG performance of a company can affect the cost of financing and the company's share price. Stan Ho, the chief representative of SynTao Green Finance, emphasized the impact of ESG ratings on a company and pointed out the importance of ESG ratings in IPOs, credit ratings, & etc.

【Stan Ho】 First, I want to say that whether there is "E" or "S" or not, from a financial standpoint, "G" is very important. Secondly, we might see an American company named MSCI in Hong Kong. It is also an ESG evaluation and data company. It is quite big. We can see that its market share is 60%. Another company, Sustainalytics, (has a market share of) 20%. Although we might ignore or don't believe in the ESG rating methodologies of these US companies, they do have quite a significant impact on Hong Kong and Mainland China's companies. So when we look at their ESG rating standards, there are "E" "S" and "G" and probably 33 factors to evaluate. MSCI makes it very clear that no matter which country the company is from, the G weighting is at least 33%, which is one-third of the total score. I asked some Hong Kong companies and they told me when MSCI assesses their ESG ratings, the G weighting is 50%. When we talk about "E" and "S", we might have some objective standards. But when we talk about "G" (it could be subjective). For example, diversity. How do you define what is more diversified? Or when we talk about ESG-related pay, how do you define whether it's good or not? Unfortunately, MSCI is now the monopoly of the rating market. I want to say that it's not like we have to accept the MSCI's ESG rating, but now it is the monopoly in Hong Kong. Some foreign investors will refer to the ESG ratings and the "G" score is very important, that is what I want to say, whether it is for IPO or credit rating, or ESG rating, "G" is quite important. This is what I want to add, thank you.