Sustainable Investment's Future and Present

On March 18, 2021, MS.Bai Hong, secretary-general of CASVI was invited to participated in the monthly training activities of the Beijing Fund Industry Association and conducted the “ESG Investment concept, Practice and Development” and “Sustainable Development Value Investments” topic sharing.

“The starting point and the end point of a century of change is the change in the perction of our value anchors. As an investor, we should always pay attention to the dynamics of sustainable development, clarify the sustainable development value, and choose the opportunities and investment strategies,” Ms. Bai Hong has mentioned.

Source: CASVI

MS. Bai Hong's Speech

Ladies and gentlemen, I am Bai Hoing, secretary general of CASVI, which is a new international public welfare platform established in 2016 to promote sustainable finance. Why we focus on sustainable finance, and why we do ESG investment? I have been trying to answer these two questions in the past years. We are all believers in the market rules. Then since the market is efficient and competitive, why bad situations often occur?

Several days ago, severe sandstorms and haze weather occurred in Beijing. If the flow of investment funds, the development model of enterprises, and our lifestyles never change, can the haze and bad weather be eliminated? How could we face and solve these problems?

In fact, the above issues are all in common. The environment we want to live in is not just about economy and wealth, but whether we are happy or not are influenced by many external factors, and the most important ones are whether the society is harmonious and whether the ecological system is sustainable.

In the more than 200 years since the industrial revolution, especially China’s development since the market reform for more than 40 years, our productivity has achieved unprecedented growth, but commercial activities have also brough negative external effects, which have caused human society and the natural environment many negative impacts.

On the other hand, we do not need to be too pessimistic as it also happens to be a good point of change: we need to reconstruct our allocation system of production factors represented by capital. Can we not only consider Alpha (excess return) as the only objective, and not only consider financial returns but also other social values? Can we break away from existing KPIs, and invest in ESG to promote sustainable development? In fact, we are changing our values and ideology.

The end and the starting point of a century of change is our value anchor. If we say that the economic returns were the connotation of our entire value, then now the value anchor has drifted to consider the comprehensive social and environmental values. This drift of value anchor will lead to fundamental changes in our resource allocation system, production methods, and lifestyles. Thus, we need to upgrade our investment philosophy from pure financial returns to external effects such as social and environmental values.

Sustainable development goals: from ideal to practical: find the values for our capital

We utilize ESG investment to achieve sustainable development goals and depend on ESG investments to promote sustainable development. To define sustainable finance, we combine Financial Performance and ESG effects created by enterprises so that we pay attention to financial returns and non-financial values. We focus on whether we can use core capabilities to solve social and environmental problems? Thus when we re-look at sustainable development, we should focus on the enterprises integrally including the values created.

For instance, if company A makes profits with good social influence, while company B makes profits with bad social impacts; although their financial performance is the same, considering ESG value, we find that the value content of enterprise A has increased while the economic value created by enterprise B is at the huge public cost. Thus if we internalize the external effects and financialize the non-economic contributions of firm activities, we can see the value of an enterprise more comprehensively.

Cross-industry cooperation and China’s practice

Sustainable development focuses on economic, social and environmental aspects. In 2015, the United Nations proposed the 2030 agenda for Sustainable Development, which included 17 major goals, 169 small goals, and around 300 indicators. It should be noted that only China has completed the first goal of the 17 goals—zero poverty—by 10 years ahead of the schedule.

To achieve sustainable goals, we cannot only rely on individual private equity funds or wealthy individuals. We need to change the operating mechanism so that the allocation of resources will be transferred. I think it is a measurement tool and an evaluation model that can boost such a transfer. For instance, whether a company treats employees well, or whether the supply chain is improved will not be evaluated without a measurement tool. Only when spotlight the entire value system, we would change the enterprises’ behaviours and choice of capital.

As a public welfare organization, in the past five years, CASVI has assembled many Chinese and foreign expertys to build models to measure social environmental effects, and conduct market research. We focused on listed companies due to their verifiability. If enterprises can be repeatedly verified by the market, it shows that there is continuous value in these firms. We also made an analysis to verify the positive correlation between justice and profit with empirical methods. It means that if a company does a good job in green development, justice and profits can be transformed and strengthened, the competitiveness of the company can also be increased.

Moreover, CASVI and Boshi Fund jointly created the Sustainable Development 100 Index, which was listed on the Shanghai Stock Exchange on October 24, 1029. Then in December, we released China’s first sustainable development Index: CSI Sustainable Development 100 Index.   

Under the leadership of President Ma Weihua, we also shared the funds globally. The cross-border cooperation is important as sustainable development is a global concept. We cannot produce something that only reflects Chinese characteristics but completely deviates from international standards.

source: CASVI

Currently, we are improving our algorithm. In fact, according to a large amount of analysis, for any investment portfolio, if the investment period is more than 12 months, the better ESG rating for the sustainable development goals, the more significant is the excess return. This phenomenon verifies the truth of the transformation of justice and profit.

How are ESG elements incorporated in investment analysis and decision-making?

In fact, from the perspectives of evaluators and the enterprises, we need multi-dimensional integration of values from financial expectations, values, long-term strategies, targeted market and customers, innovation, risk-averse capabilities, to the ultimately created economic, social, and environmental values.

Next, what kind of technical routes and tools will be used? For instance, in screening, it depends on investors’ preferences. Then we dynamically monitor and score. Furthermore, we will evaluate individual stock’s external effects in terms of its financial returns and ESG performance. At this stage, the scale of asset management is expanding rapidly. When it comes to sustainable investment, the first driving force is risk control. However, we cannot ignore the group effect. When most of the capital is chasing these high-quality enterprises, its excess return rate will become more significant. However, when there is no clustering effect, risk control is a very important. Looking at the world investment history, this was also the case at the beginning. In fact, the entire ESG investment portfolio accounts for more than half of the global investment, especially in Europe. Among the major markets, China's share might be the lowest.

Below I have two indicators to share. First, China is the country with the largest carbon emissions in the world, accounting for about one-third. Second, our ESG investment ratio is very low, below two percentage.

We need to mobilize big funds first. As far as I know, big banks and funds are reviewing the overall strategy of sustainable development investment currently. To truly implement sustainable investment, there must be a market environment. Take the secondary market equity investment as an example. There is still a huge difference between China and the US market. Basically, 90% of the US market is composed of institutional investors. This is not the case in China. In China, it is a game between institutions and individual investors. It is because retail investors rushed into the stock market in an irrational and extremely asymmetrical way. In the Chinese market, we actually seen a better sign that the proportion of individual investors has dropped from 90% to 80%, and now it has dropped to around 60%. In addition, as a product, ETF has become popular in 2018 and 2019, which represents a trend: now we rely more on rational logic. The market is maturing step by step, pushing us to gain more insights and even harvest the ESG values.

Pay attention to the dynamics, clear strategies, and move at the right time

I think the underlying logic of investment is the same, and the core is to focus on risk and return. First of all, we must pay attention to the dynamics, because we are in an era of rapid changes. When everyone talks about the century of change, it is not a faraway thing. The drift of value anchors will cause drastic changes in public policies, capital markets, and investment entities. The changes in the key resources of this ecosystem will give birth to new products and new profit growth points.

Second, we must clarify strategies and focus on our core capabilities. If we are to be responsible for capital, we still have to follow the sustainable development investment strategy, combining our capabilities with a balanced focus on financial returns and non-financial returns. For example, we are most familiar with the health and medical field, so we might as well lean towards inclusive health and inclusive medical care instead of jumping to green agricultural technology all at once.

The third is to choose the opportunity. For Chinese investors, when many new opportunities come, the biggest killer is “a speculator’s psychology”. We might as well slow down, rather than overrun, and improve the quality first. To enter the field of sustainable development, we need to attach great importance to integrity, and once if we destroy our integrity, the cost of restoration and reconstruction will be very high.