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Asia lens on global ESG
By Advisor Perspectives
There are many ways in which a firm can construct the illusion of shareholder value creation (as they often do), while actually hurting it over the long term. Take, for example, a manufacturing business that might cut costs, boosting short-term profits by releasing untreated sewage into a river. Doing so will seemingly lift its short-term cash flows but will also substantially increase the variability of its long-term cash flows because the potential threat of regulatory actions, that may thwart business, is never far off. Similarly, a firm can cut back on research and development expenses to boost short-term profits. But that can often damage its long-term prospects.
Therefore, a focus on solely short-term profit generation may allow observers to draw misleading conclusions about a firm’s long-term prospects. In accurately assessing a firm’s long-term prospects, it pays to understand the environmental and social impacts of its business practices on all stakeholdersinvolved, which could lead to better outcomes for shareholders in the long run. By stakeholders, we mean employees, a firm’s neighboring community, supply chain, customers and regulators in addition to shareholders. This is what the incorporation of Environmental, Social and Governance (ESG) factors in investment analysis purports to achieve. Businesses that meet ESG standards are generally businesses that make human or business activity less destructive to the environment, as well as promote positive social and economic developments. Therefore ESG focus is part of a focus on long-term shareholder value creation as companies that fit this bill may be better able to spot and execute on long-term growth opportunities. Equally importantly, such companies may be also better able to identify and manage risks effectively, potentially resulting in improved risk-adjusted outcomes for company shareholders.
Asia: Act Locally, Impact Globally
For investors looking to make investment decisions based upon ESG factors, Asia represents one of the best opportunities to gain exposure to companies that can make a long-term difference to the region and the world. There are a range of global ESG issues that cannot be addressed effectively and solved globally unless they are addressed and solved in Asia first. For instance, with respect to climate change, Asia today is the largest regional emitter of carbon. It emits approximately 2.5x the carbon that North America emits, and four times that of Europe.
On the back of impressive growth over the last several decades, the Asia Pacific region accounts for 28% of global GDP and 31% of stock market capitalization. Asia’s growth has lifted hundreds of millions of people out of poverty and created a large and vibrant middle class. But an economic model that prioritized growth without regard to externalities has led to rapid deterioration of the environment.
Read more at Advisor Perspectives
Photo: NASA Goddard Space Flight Center