Seize the moment – if not to embrace the business of opportunities then to mitigate the rising cost of capital.

by Kathryn Davies Greenberg, CEO Shared Value Project Hong Kong

September 2018

During the past month I have listened to the changes being driven in and by the financial markets:  Where significant sums of money can be gained or lost. I was reminded that risk is quickly reflected in stock values when contracts are revoked due to a plantation not demonstrating sustainable practices and that the scarcity of natural resources –particularly clean water, has a direct economic impact.  I also learnt that the growth in female wealth and millennials’ motivation to address inequality, are starting to have an effect on investment criteria. The financial impact of this increasing focus on sustainability can be four-fold.

  • Policy and Disclosure- Internationally, we are seeing more interest in responsible ownership and a dialogue starting on the effective stewardship of KPIs and ESG.  The misalignment of national and corporate goals is being considered, as systemic failures in taxation and licensing are being exposed. Governments are re-evaluating where value from natural and national resources should accrue.
  • Green Finance and Social Impact Bonds have proven concepts elsewhere and the capital is flowing in. Hong Kong’s Green Finance Association recently launched on Friday 21st September, exactly one year since our own launch.  The Social Impact Bond can provide risk finance for social initiatives by securing an acceptable return (exit price guaranteed by government) for the initial capital investors, upon the successful delivery of performance targets by the project. Furthermore, HK Government’s Chief Executive Carrie Lam announced HK$100 billion towards a Sovereign Green Bond Issuance Programme, and the Green Bond Grant Scheme, which subsidises the costs issuers incur in obtaining certification under HK’s Green Finance Certification Scheme. They have also put in place an enhanced Qualifying Debt Instrument scheme to spur market demand. It offers tax concessions for bond investment in Hong Kong.
  • Institutional investors in Asia are becoming more active as data improves and social issues and climate change come to the fore.  Sovereign wealth funds are the first to act on ESG recognizing the long-term value created and that regional sustainability is being challenged.  The assets under management in Asia currently pledged to responsibly invest is less than 1% compared to the most advanced region being Europe at 52.6%, hinting at the scale of pressure to come.

According to EQT, with the knowledge that diversity within a team enhances performance, we are now seeing the launch of diversity-based indices that score corporations based on a set of key performance indicators. This is in addition to increased scrutiny of the Environmental, Social and Governance Report required by the stock exchange.  The important message is that companies need to understand the constituents and materiality of their risk. As analysts start to probe and challenge, risk will be re-priced by the market. Furthermore, stakeholder engagement and corporate communication will be all the more important.

  • Retail investors are increasingly engaged on the issues of inequality, particularly the role of business within its social construct and around sustainability issues. Funds will be launched to meet this growing demand.  Technology may also prove to be a disruptor as it showcases the risk with real time effect, such as when exposing green washing that can wipe billions of dollars off a market capitalisation. Moreover, equity could see more crowd funding and dis-intermediation of the financial advisor.  This makes both reputation risk and responsibility surrounding ESG of greater materiality to business.

In order for business to achieve sustainable growth, we believe that it makes sense to align with the national commitments to the 2030 Sustainable Development Goals where you operate: Gain competitive, if not first mover, advantage in your sector by identifying and creating some shared value. The risk remains that government decides to make it mandatory through regulation or taxation.  Encouragingly, government is currently opting for incentives. To achieve responsible innovation requires inspiration and personal leadership. Shared Value Project Hong Kong provides this support to shared value champions and practitioners encouraging innovation with financial, social and/or environmental objectives into business operations and market development.