Tuesday, July 23, 2024
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Interest in sustainable investing has skyrocketed in the past years, particularly in the Asia-Pacific region. The driving factors include the prioritisation of sustainability initiatives, regulations from government bodies, and mainstream investment opportunities led by influential investors. Can companies operate and develop green economic activities and still net a profit? The answer looks positive.

To discuss the opportunities and risks inherent in the shift towards sustainable investment,  a webinar was presented in partnership with LSEG (London Stock Exchange Group). The speakers included Alexis Rocamora, APAC lead for sustainable finance and investment research at LSEG; Amie Shuttleworth, head of sustainable investment from Undivided Ventures, and Gabriel Wilson-Otto, head of sustainable investing strategy from Fidelity International.

The green economy is substantial and growing

Rocamora presented data from the green revenues dataset highlighting information gathered by LSEG over two decades about the main trends driving the green economy. While what is considered “green” is a subject of debate, the green revenues dataset analyses over 18,000 companies on a yearly basis, covering 98% of global market capitalisation.

It evaluates how ‘green’ the revenue of a company is by using language reading software and tools to analyse the disclosures in their integrity reports. Rocamora pointed out that “there is a version of green in each and all the industries.” LSEG uses its ICB (industrial classification) supersector to share the percentage of green exposure of a certain industry so investors can make informed decisions on portfolio management.

Metrics include the degree of exposure of a specific industry to green economic activities, market size, market capitalisation, and more. According to Rocamora, the green economy is “substantial and growing.”

In 2021, it represented 8.1% of the global market capitalisation of listed companies, equating to an almost US$6 trillion investment opportunity. In comparison, the green economy’s market capitalisation was between US$1.4 trillion and US$1.6 trillion from 2009 to 2012. While the numbers dipped in 2022 to 5.8% of global market capitalisation, Rocamora pointed to the rebound trend over previous years and expected a similar development for 2023 and beyond.

Revenue generated from green economic activities has remained on a steady growth trajectory since 2009, even as the global economy fluctuates. As of last year, the green economy constitutes approximately 7.7% of global revenue from the entire listed market. Movement-wise, the growth trend is similar for the performance of green opportunities versus the oil and gas sector.

Breaking down the green economy by sector, size, and green tier, Rocamora debunked the commonly held assumption that “green opportunities mainly come from only the renewable energy sector.” Energy management and efficiency, transport equipment, energy equipment, and energy generation also make significant contributions.

In APAC, out of the US$6 trillion global market capitalisation, China is dominant, followed by Taiwan and Japan. Rocamora observed that the growth of market capitalisation in these markets had been even faster than those in the West, pointing to Taiwan’s leading semiconductor industry and the hybrid automotive sector from Japan.

A growing synergy between sustainability and profitability

In the subsequent panel discussing sustainable investing and its opportunities and risks, Shuttleworth and Wilson-Otto both agreed that APAC has made significant strides in sustainable investments, with increased collaboration between investors. As concerns around the financial materiality of climate change have grown, spurred in part by environmental regulation changes in mainland China, the synergy between investing sustainably and increasing profit has become more apparent.

“You didn’t need to care about climate change to make money by investing in renewable energy,” said Wilson-Otto. He also praised the assertive regulatory response in adopting minimum standards for regulatory disclosure, the introduction of stewardship codes, and product labelling requirements.

However, the nascent Asia-Pacific market is still coming to grips with these developments. Shuttleworth pointed out that there is “limited awareness and understanding of what impact investing is versus ESG investing. Many people still think that impact investing is philanthropic.” Rocamora articulated the “struggle to define what is sustainable, and what is green.” He said, “But that doesn’t really help investors go from point A to point B into developing a sustainable investment strategy.” Pledging to net zero targets is the first step, but transition planning to achieve a sustainable business model is equally important.

The need for shared standards and definitions

Finding common ground for taxonomies is key to creating a local transition pathway. A lack of shared standards and definitions hinders sustainable investment and communication across different Asian and global markets. This often leads to confusion and claims of greenwashing. Wilson-Otto succinctly pointed out that differences of opinion can arise — what is green for one country may not be enough for another. He believed it was therefore critical for regulators to focus on things that are “deliberately or demonstrably misleading.” Rocamora also saw an opportunity in transparency. “When companies align their disclosures with commonly agreed frameworks, it will help them be on the map for investors,” he said.

As to the efficiency of sustainable investment, Wilson-Otto noted that due to the inconsistent definitions, “not investing in bad things is not necessarily directing capital towards the right activities.” Companies are stuck on ESG integration, using those scores to make better fundamental investment decisions, but that’s “not a deliberate impact strategy, where you’ve got those real, tangible, measurable outcomes with what you’re doing.”

For companies to improve their strategies, Wilson-Otto stressed that sustainable finance must deliver on its promise and meet the “pent-up demand from investors who want to put their money towards something tangible. It’s up to us to generate the appropriate financial products that can act as that bridge, with the appropriate level of transparency and clarity of impact and alignment,” he concluded.

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