Editor's note: The Hong Kong Sustainable Disclosure Guidelines officially came into effect on the 1st of last month. However, discussions in the market about the decline in ESG (Environmental, Social, and Governance) interest are increasingly common. What are the reasons behind this? Is it related to the Trump administration's withdrawal from the Paris Agreement?
【Anchor】Hello everyone, welcome to DDN Business Insider. I am Yunfei Zhang. The Hong Kong Sustainable Disclosure Guidelines officially came into effect on the 1st of last month. However, discussions in the market about the decline in ESG (Environmental, Social, and Governance) interest are increasingly common. What are the reasons behind this? Is it related to the Trump administration's withdrawal from the Paris Agreement? What do you think, Professor Shi?
【Shi】Indeed, from last year to this year, we have seen a phenomenon of capital outflows from ESG-focused funds, indicating a decline in the overall amount. There are several key factors at play. The first major factor is that it's undeniable that both the United States and the European Union have experienced a politicization of ESG, particularly evident in the U.S., where ESG has been labeled as a Democratic initiative, while the Republican Party is generally anti-ESG. After last year's European Parliament elections, we saw a decrease in the Green Party's representation, while the far-right parties have notably increased.
In this larger context, and with new geopolitical conflicts emerging, the EU is reconsidering its policies on ESG and sustainable development, aiming to better link ESG with sustainable competitiveness and industrial strength. This includes reducing bureaucratic hurdles and easing regulations that may hinder corporate development.
Overall, there is a global economic downturn and persistent inflationary pressures, which lead companies to prioritize cost-cutting as a crucial decision-making factor. We can observe that some financial institutions are cutting their recently established sustainable finance departments, and some corporations are streamlining their ESG departments. This trend is understandable given the current geopolitical environment. From the EU's perspective, there may be a disconnect between regulatory requirements for sustainable development and the actual needs of corporate development.
I believe that, as a result of this, the cooling down or retreat in ESG interest may not necessarily be a bad thing for us; in fact, to some extent, it could present an opportunity.
First, many regulations previously introduced by the EU, such as the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence and Accountability Directive (CSDDD), highlight a significant gap compared to the current development of Chinese enterprises in this area. If these regulations were to be fully implemented as international norms, it would be quite challenging for Chinese companies to meet these demands in a short period.
Therefore, the EU's reconsideration of important regulations, such as carbon tariffs and the Carbon Border Adjustment Mechanism (CBAM), makes these regulations more practical. For Chinese companies looking to enter the EU market, this could actually be a positive development. The existing gap means that we would need to invest more resources and face greater challenges to comply.
This situation provides a breathing space for Chinese enterprises and offers a better time window for us to leverage the current policy flexibility. We can focus on addressing our shortcomings, as we have many areas to improve. Otherwise, we would face even greater challenges.
Secondly, even in the U.S., companies may not want to overtly promote ESG initiatives, but they are indeed making concrete efforts. This includes catering to the growing demands of younger global consumers for corporate responsibility in product production and performance. Consumer preferences are gradually shifting, and mainstream attention to these issues remains strong. The emphasis may shift away from labeling it as ESG, focusing instead on corporate resilience and responsibility.
The key question is how we can leverage this relatively relaxed window of a few years to effectively address our responsibilities and shortcomings. In a few years, as climate risks and crises worsen and as international political dynamics shift, there will likely be renewed attention in this field. At that time, we will be better positioned with stronger foundations, including the potential to provide advanced standards and best practices from China.
【Anchor】I would like to ask you, Professor Shi, do you think this is a good time to promote ESG standards with Chinese characteristics?
【Shi】This has been a very hotly debated topic in recent years: the proposal for an ESG standard with Chinese characteristics. I believe there is both necessity and value in this. On one hand, ESG and corporate sustainability efforts have been predominantly driven by business entities in developed countries. These efforts reflect their experiences and current realities, which are significant determining factors.
In contrast, countries like China and other emerging economies, which are increasingly contributing to the global economy, have relatively weak voices in these discussions. I often tell multinational companies that their production or sales in China may account for over 20% of their total, yet many European and other companies include very few elements pertaining to China in their overall sustainability reports. This is not just about proportional representation; the presence is quite minimal.
This situation is unfair, and more importantly, it lacks diversity in participation, which is itself a weakness. Achieving a truly inclusive standard is not an easy task. First, there is a need to thoroughly understand the mainstream international ESG sustainability framework that has developed over the past two to three decades. It's not simply about starting from scratch and proposing something new.
The key question is whether a Chinese-characteristic ESG framework can gain acceptance and adoption by other economies. The real test lies in this aspect.
To achieve this, I believe the first step is to fully recognize, understand, and master the content of the existing mainstream ESG standards. This is a significant challenge, as these standards are the result of the accumulation and development by others, which we need to analyze.
Secondly, for our standards to gain genuine recognition from more economies, we need to propose a set of standards and practices that have promotional value and broader universality. China must present its own ESG practices that can be recognized by a wider range of countries, including both developing nations and developed ones, to establish real credibility for what we aim to propose.
What does this depend on? First, we need a group of talents in sustainable development who have a genuine international perspective. Without this, how can we propose something that is considered acceptable? Additionally, we need a cohort of companies with an international outlook that can stand on equal footing globally and showcase China's advanced practices.
Only with these elements in place can we hope to propose a sustainable development standard system with Chinese characteristics. This will take time, and while there is willingness present now, the challenge lies in solidifying these key elements in a relatively short time. The goal is not just to create a superficially Chinese ESG framework, which is easy to do, but to develop something that is genuinely accepted and embraced by others. I believe this is a crucial blueprint we should aim for now.
【Anchor】Despite the current voices in the market regarding the cooling down of ESG, as you mentioned, there are hidden opportunities. How do you think Hong Kong can seize these opportunities?
【Shi】In recent years, Hong Kong's development in green finance has indeed been commendable, earning praise from many. However, the challenge lies in elevating this to a higher level and addressing the persistent issue: whether ESG investments yield lower returns compared to traditional investments that do not consider ESG factors. The primary argument against ESG investing is that the returns from ESG investments are believed to be lower than those from traditional investments that exclude these factors.
If the Hong Kong market can genuinely demonstrate, through the combined efforts of companies in management and disclosure, alongside third-party rating agencies and investors, that ESG investments can indeed deliver higher long-term returns, this would be a decisive factor for the development of green finance in Hong Kong. It serves as a litmus test: engaging in ESG investments should not be seen as trading-off investment returns against social benefits and environmental protection; rather, it should be about achieving better long-term investment returns and long-term value. This must be validated through empirical studies demonstrating alpha generation, yet to date, no economy has effectively accomplished this.
On the other hand, if this can be achieved, Hong Kong will become an even more attractive destination for Chinese companies looking to go overseas, as well as for other economies' companies wishing to list or invest in Hong Kong. This can serve as a concrete pathway for enhancing the development of green finance and solidifying Hong Kong's position as an international financial center.
【Anchor】Thank you, Professor Shi, for being our guest today. That's all for this episode. Remember to follow us on YouTube or download our APP. I'm Yunfei Zhang, thanks for watching, and see you next time.
Anchor: Laura Cheung | Edited: Kelly Yang, Laura Cheung, Rachel Liu | Translate: Kato Ip | Proofread: Chris Liu
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