The global Environmental, Social and Governance (ESG) assets will grow at 15% and exceed US$ 53 trillion by 2025, representing around 37.7% of projected total assets under management. More than half of the global ESG assets came from Europe. The U.S. has seen the strongest growth recently. Asia is expected to drive the next wave of growth in ESG investment.
In Q3 2020, US$203 billion flowed into ESG funds and the capital inflow trend is not slowing down despite the Pandemics. Furthermore, the ESG debt market is also expected to expand from US$ 2.2 trillion to US$ 11 trillion by 2025.(Diagram 1) The ESG debt market contributes meaningful capital investment to the development projects for our sustainable future. The Hong Kong government and China’s central bank also revealed their plans of green bond issuances in the coming years.
Why is ESG so important to companies ?
Investors and fund managers, who like to be seen as responsible to the society, will support projects and businesses that contribute positive impacts to our environment. Therefore, they will set investment criteria on Environmental, Social and Governance (ESG) standards to select companies with ESG practices. Capital acts as a key driver to encourage more companies to be responsible to the public and to fight for a healthy planet, advance democracy, data transparency and professional integrity.
Statistical research report from University of Rome in June 2020 found evidence that companies scoring high ESG performed higher excess return and lower volatility in stock market.
Harvard also used data from ISS ESG Corporate Rating to create an interesting company performance report and concluded that high ESG rated companies were associated with higher profitability, lower risk and better allocation of capital. Strong ESG scores correlated to higher Economic Value Added (EVA) Margin, larger EVA Spread, stronger Return on Invested Capital (ROIC) and lower volatility.
Another report from MSCI pointed out that the return of high ESG scored companies (shown as ‘T3’ in the table below) outperformed the other equal-weighted benchmark. T3 demonstrated larger active return at 1.31%, higher earnings growth at 2.89% annually and higher reinvestment returns at 0.28%. T1 consisted of the companies with the lowest ESG rating. The main reasons for outperformance in ESG stocks were the strong companies’ earning growth and better dividend yields.
Stakeholders of all kinds want companies to be more sustainable, socially conscious and well governed (Diagram 2) . Corporations following the ESG practice will create valuable branding and enjoy good reputations. As a result of good relationships with stakeholders, the companies will receive a higher credit rating in creditor assessment, obtain a lower borrowing rate and broaden capital sourcing. Better cash flows will attract more investors, particularly the large investment funds, to invest for the long term. Market capitalization will increase accordingly. Therefore, corporate performance, investment return and ESG issues are inextricably linked. Strong ESG positioning correlates with higher equity performance.
In addition, according to the research from McKinsey & Company, ESG practice improves the company performance in 5 important ways. First of all, reducing costs. Secondly, increasing employee productivity. Thirdly, minimizing regulatory and legal interventions. Fourth, facilitating top-line growth. Lastly, optimizing investment and capital expenditures. Therefore, practicing ESG standards will not lower the company’s return.
How can companies align with ESG practices ?
The United Nations (UN) published 17 Sustainable Development Goals (SDG) of Envision 2030 to achieve a better future for our world. Certain goals require governments participation, especially those related to human rights and poverty. Nevertheless, many of those related to pollution and climate change can be managed by companies as well as investors, such as Goal 7: Affordable and Clean Energy, Goal 9: Industry, Innovation and Infrastructure, Goal 11: Sustainable Cities and Communities, Goal 12: Responsible Consumption and Production and Goal 17: Partnerships to achieve the Goal.
Furthermore, the Chinese Securities Regulatory Commission (CSRC) released new guidelines for listing companies to voluntarily disclose ESG information in their financial reports. They are required to provide transparency on environmental breaches and to make efforts to reduce carbon emissions as well as other ESG initiatives. The national climate commitment and new regulations will put pressure on Chinese municipalities and companies to have business strategies change significantly. The Asset Management Association of China (AMAC) promulgated China’s first self-regulation standard for the asset management house on green investment in 2018. This Green Investment guideline encourages fund managers to focus on environmental sustainability and environmental risks. It also defines the scope of green investment, promotes green investment, enhances green investment scale and fosters sustainable economic growth.
Hong Kong Stock Exchange has also imposed the rule of ESG reporting guide on 1 July 2020. Listing companies are required to publish ESG reports mandatorily. However, the management of the listing companies set their own criterias for determining the scope with respect to their own businesses.
Promoting SDGs in Greater Bay Area (GBA)
China proactively adapts to the GreenHouse Gas (GHG) emission reduction scheme to fight climate risks in its cities and coastal areas. High income areas generally consume more, create more waste and carbon emissions. Energy saving becomes an important topic for high net-wealth cities, especially the GBA. The Hong Kong government also promotes energy saving and suggests commercial and residential buildings keep indoor temperature to between 24°C to 26°C. They hope this strategy can reduce 40% of energy consumption by 2025 using 2005 as the base, making the GBA more livable and competitive for the sustainable ecosystem in the world.
Energy, consumer-discretionary, material and utilities sectors are under the spotlight of emission reduction, as they are required to shift to clean technology. New, innovative, clean technologies and products will have the highest potential growth in investment opportunities. Capital gives incentive to companies to operate the SDG projects. In fact, SDGs development can deliver a ‘Win-win-win’ strategy for the company, its stakeholders and our environment.
Addressable Greater Bay Area SDG Goals
Goal 7 — Affordable and Clean Energy: This goal is to ensure everyone can access clean energy at an affordable price by 2023. The Chinese government targets to increase clean power generation in order to raise the national clean energy consumption to around 20%. It also encourages companies to invest into clean energy technology and energy efficient technology.
Goal 9 — Industry, Innovation and Infrastructure: This goal supports innovative technology development in the sustainable energy sector, aiming to create more clean energy and energy-saving products for the public. Adopting new technology as well as smart technology, people will make a revolutionary change in their energy consumption behavior.
Goal 11 — Sustainable Cities and Communities: This goal enhances the sustainable urbanization and the capacity for sustainable urban management by 2030. It supports development plans for positive impacts to economic, social and environment, particularly in the solution of pollution as well as waste management. Hopefully, our natural heritage and rural areas can be preserved for our future generations.
Goal 12 — Responsible Consumption and Production: This goal implements a 10-year framework on sustainable consumption and production to achieve the environmentally sound management of all wastes. It aims to reduce pollution to our planet and minimizes the harmful impacts on human health. It urges companies to optimize the resources usage in daily operations and reduce waste generation through prevention, recycling and reuse.
Goal 17 — Partnerships to achieve the Goal: This goal is to request partnership for sustainable development. It encourages companies to work together to mitigate the global warming crisis. It also encourages companies to engage with stakeholders who hold the same value in ESG. Environment conscious companies should source resources from green companies, especially the clean energy generating companies and recycling manufacturers. Environmental conscious investors should invest their capital in companies with high ESG scores. Environmental conscious consumers should buy products and services from companies that demonstrate moral responsibilities.
Urban Gateway Energy is a Hong Kong based Private Equity group that is ESG driven and are reimagining the urban environment to meaningfully contribute to our planet’s sustainable future. Urban Gateway currently has three diverse climate action driven portfolio companies in multi-billion-dollar market segments related to Waste-to-Value, Virtual Power and Cooling.
Urban Gateway embraces ESG and allocates funds to support its portfolio companies achievement of SDG goals in the Greater Bay Area. Urban Gateway’s business model by design creates partnerships to achieve its goals, and it is intrinsically aligned with Goal 17 (Partnerships to achieve the Goal). How other SDG goals are achieved by its portfolio companies are highlighted below.
EnerWaste Asia Pacific Limited
One popular clean energy technology solution is incineration-to-power, which converts municipal waste to clean power. In addition to solving the limited land availability issues associated with landfills, incinerating the biological (e.g. food) components of waste mitigates the generation of methane, which is 25 times more potent a greenhouse gas than carbon dioxide. This is because landfills can only capture approximately 50–55% of methane that is generated from biological sources. However, given that municipal waste has plastic, metal and other components, incinerators emit toxins into the air in addition to producing hazardous waste in the form of fly-ash that must be disposed of in special landfills.
EnerWaste is addressing the same landfill and methane mitigation issues as incinerators, however, has chosen to use a proven technology that instead of incinerating waste to make steam and then electricity, converts waste to clean syngas with zero air emissions in addition to a non-hazardous solid waste by-product and water. This clean syngas can then be further converted to clean hydrogen — one of the most important clean energy sources of the future. It is important to note that the EnerWaste platform also uses 75% less electricity compared to electrolysis, the current leading technology for producing clean hydrogen. This is important for two reasons, first, not every province or city government has access to renewable energy (required for electrolysis) and by using electricity much more efficiency significantly reduces the strain on the power grid, of particular importance given the state of power supply in China.
The EnerWaste platform provides local governments the ability to turn their waste, including hazardous wastes incineration cannot process (e.g. tires, plastics, medical waste, etc.) into a high value energy source — clean hydrogen, which is a cornerstone of any clean energy future.
EnerWaste addresses Goal 7 (Affordable Clean Energy) by having one of the only platforms today that can produce green hydrogen that is aligned with China’s cost and sustainability goals. The EnerWaste platform is also unique, not only due to its highly proprietary technology that converts waste to hydrogen, but because of its ability to integrate with incineration, electrolysis and other technologies, creating innovative green energy infrastructure projects delivering on Goal 9 (Industry, Innovation and Infrastructure). Finally, the EnerWaste platform is uniquely designed to help new and existing communities develop circular economies, where all waste is converted to something of value to the local community and delivering on both Goal 11 (Sustainable Cities and Communities) and Goal 12 (Responsible Consumption and Production).
EnerCloud Asia Pacific Limited
Another popular clean energy technology solution are smart home thermostats that connect air conditioners to a home WiFi network and allow users to create programmable temperature settings based on daily schedules, weather conditions and heating and cooling needs, in addition (in some cases) to learning a household’s patterns and adjusting heating and cooling according to when a home is occupied or is about to be occupied.
EnerCloud however has developed a proprietary smart energy solution that can cost effectively deploy air conditioner control functionality to entire buildings, compounds and campuses without needing a local WiFi connection. This product allows developers, schools, hospitals, commercial & retail building owners and local governments to provide occupants with an enhanced level of comfort while simultaneously saving energy. The technology also converts each air conditioner into a “virtual power plant”, which provides the power grid flexibility to reduce air conditioning load on hot days, when air conditioning can represent up to 50% of total electricity demand for a city! This not only helps prevent black-outs and brown-outs, it keeps polluting coal and gas power plants from having to meet this extra-demand. Finally, EnerCloud’s platform provides an option to convert these same air conditioners into air purifiers also, adding a wellness component to their solution.
The EnerCloud platform provides local governments and the central power grid the ability to cost effectively and rapidly turn millions of air conditioners (there are over 500 million units in use growing at 14 million per year) into virtual power plants, which not only saves money and energy, but also saves the environment!
EnerCloud addresses Goal 7 (Affordable Clean Energy) by helping reduce the overall cost of power by providing a much more cost-effective resource to meet peak energy demand, and these savings can be passed on to the end-user. The EnerCloud platform is also unique, in that it takes technology from overseas but has customized it for the unique needs of China and in concert with electric market reform policies that are currently being piloted, delivering on Goal 9 (Industry, Innovation and Infrastructure). Finally, the EnerCloud platform is uniquely designed to help new and existing communities develop virtual power plants, where energy is not only conserved but also avoids the use of expensive, polluting coal and gas assets delivering on both Goal 11 (Sustainable Cities and Communities) and Goal 12 (Responsible Consumption and Production).
EnerCool Asia Pacific Limited
Cooling is one of the most critical, yet often overlooked energy issues of our time. China’s cooling energy consumption in non-residential buildings represented ~50% of total cooling energy consumption and increased nearly five-fold, compared with only a three-fold growth in floor area during 2000–2017.
EnerCool’s platform addresses this critical market and is focused on air-cooled heat exchangers which are the beating heart of chiller systems. Weather, environmental conditions, dirt and debris are constantly damaging outdoor cooling equipment, which cannot be managed. Studies have shown that within the first thirty (30) days, an outdoor uncoated coil can begin to lose operational efficiency due to corrosion. EnerCool offers a unique proprietary graphene coating product that not only improves the energy efficiency of these air conditioning systems, but can also extend the equipment useful life! By reducing the need to replace the hardware, machine waste is reduced. Both energy and money are saved.
The EnerCool platform provides local governments and building owners a proven cost-effective method to not only improve energy efficiency but also reduce waste by extending the useful equipment life. For example, in Hong Kong, non-residential buildings air conditioning accounts for 20% of total energy use in Hong Kong and 30% of all electricity use — the impact of our platform at 10% typical energy savings can be very meaningful!
EnerCool addresses Goal 7 (Affordable Clean Energy) by improving energy efficiency by at least 10%, and in some cases as much as 30%, making energy much more affordable! The EnerCloud platform is offering Cooling as a Service (CaaS), which is a pay-per-service model which eliminates upfront investment in cooling technology for customers who instead pay per unit of cooling they consume, strengthening incentives for efficient consumption, a very innovative approach to delivering on Goal 9 (Industry, Innovation and Infrastructure). Finally, the EnerCloud platform is uniquely positioned to help building owners conserve energy, save money and reduce waste, on both on Goal 12 (Responsible Consumption and Production).
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