Evolving asset class still presents risks due to differing definitions, transparency levels and data quality.
Green equity is an evolving share class that could offer investors attractive sustainable investment opportunities – provided issuing corporates commit to decision-useful levels of transparency. This is according to panellists speaking at ESG and Sustainable Finance Week, hosted by regional trade association Asia Securities Industry and Financial Markets Association (ASIFMA).
Green equities are broadly defined as listed companies that derive a large percentage of revenue from environmental or social-related solutions and products. Corporates in green industries, such as renewable energy, are obvious examples of green equity issuers, but the market is expected to expand.
“Consulting taxonomies – like the EU Taxonomy – has been a useful way for investors to apply industrial classifications of green products and services when identifying green equity,” said David Harris, Global Head of Sustainable Finance for the London Stock Exchange Group (LSEG).
However, panellists noted that the green equity scope can be wider, for example, green convertible bonds, which offer a premium to investors if sustainability-based KPIs are not met, are also a potential option for equity investors to consider.
Investors can further consult LSEG’s Green Economy Mark, first launched in 2019, which has identified qualifying listed companies and funds, Harris said, adding that these corporates aren’t always involved in renewables or “traditionally green”.
“For example, chemical company Johnson Matthey primarily sells its products to green industries, but investors likely don’t view it as a traditionally green corporate,” he said.
Panellists acknowledged differing investor perspectives on what constitutes “green revenue” and whether, and to what extent, the broader management of ESG-related issues and corporate spending should be factored into investment decisions.
One way in which investors are assessing this is to look at how companies spend revenue derived from their green products and solutions, said Gianluca Cantalupi, Global Head of Reputational, Sustainability and Climate Risk and Deputy CRO for Sustainability, Research and Investment Solutions at investment bank Credit Suisse.
“Investors now want to know how much corporate revenue is then being spent on other green activities. For example, a corporate could be manufacturing solar panels or funnelling cash towards aiding its own transition to a low-carbon economy,” Cantalupi said.
Concerns around the quality and comparability of relevant corporate data means that it remains challenging for investors to weigh the benefits of green revenue against the corporate issuer’s wider ESG-related performance and exposure to risk, panellists said.
As a result, investors are upping their due diligence, proactively looking into the granularity of underlying information.
“What’s really important is that corporates are transparent enough that investors are able to understand exactly where revenue is coming from,” Harris said.
APAC’s “cultural shift”
Earlier, ASIFMA’s Asset Management Group (AAMG) published a report outlining how APAC asset managers expect Asia-based corporates push beyond the “compliance mindset” when providing disclosures on ESG-related performance and exposure to risks and opportunities.
AAMG warned that merely meeting regulatory disclosure requirements isn’t enough, adding that there needs to be evidence of a cultural shift in mindset towards recognising and reporting on ESG factors.
Corporate boards should provide information that proves there is a material change in underlying behaviours, such as more active management of ESG-related risks, the report said.
“If investors see areas where a company appears not to be addressing material ESG risks or opportunities, they will constructively engage with management and boards to take mitigating action,” the report noted.
Mitigating action could include voting against the re-election of corporate directors.
“Just as asset managers are undergoing a paradigm shift to better integrate ESG into their investment processes, they also expect investee companies to undertake similar organisational changes to better assess and mitigate material ESG issues within their scope of business,” said Yvette Kwan, Executive Adviser to AAMG.