The Philippine Stock Exchange (PSE), which now holds office and runs a more compact unified trading floor at Bonifacio Global City, switched power providers in February this year, from one that relied on coal-fired power plants to another that uses renewable energy.
The PSE, after all, is the first stock exchange in the world to commit to the United Nations Framework Convention on Climate Change, taking to heart its ultimate objective of helping rein in greenhouse gas emissions that are largely responsible for the disastrous shifts in weather patterns.
The PSE’s mindset reflects the growing consciousness in the global capital market to reward companies that take better care of the planet and the people, and operate not just for profits. Green advocates are no longer a lone voice in the wilderness and they are starting to make a concrete impact on the way companies do business and how investors shape their portfolios.
Assets under management in sustainability-focused funds are now at around $2 trillion globally as of end-March this year while quarterly inflows hit a record $185 billion in the first quarter, based on data from financial services firm Morningstar. The first $1 trillion was breached in the second quarter of 2020.
In Asia-Pacific alone, annual flows to sustainability-themed funds hit $57 billion in 2020, from just about $10 billion a decade ago, based on data from JP Morgan.
In the United States, shareholder activism has been shaking up big oil giants ExxonMobil and Chevron amid snowballing dissent over their insufficient commitment to decarbonize. Two Exxon board members had been booted out and replaced by nominees of Engine No. 1, a small activist hedge fund that launched a campaign to pressure the company to commit to a low-carbon future.
And more modern-day green Davids are taking on Goliaths.
In the case of Chevron, 61 percent of shareholders heeded a call by Dutch advocacy group Follow This to vote on a proposal to cut “scope 3” emissions. Scope 3 emissions are the result of activities from assets not owned or controlled by the reporting organization, but that the organization has an indirect impact through its value chain.
In the Philippines, such kind of shareholder activism has yet to stir the business world, but regulators are taking the lead, if not the companies themselves initiating the transformation.
In November last year, the government imposed a moratorium on accepting new proposals for coal-fired power projects. On the corporate regulatory side, the Securities and Exchange Commission approved the “Sustainability Reporting Guidelines for Publicly-Listed Companies (PLCs)” back in 2019, requiring the disclosure of compliance and noncompliance with the recommendations provided under the Code of Corporate Governance for PLCs operating in the Philippines.
By next year, as part of its bid to champion “environmental, social and governance” (ESG) metrics, the PSE plans to introduce an ESG-tracking index to help sustainability-focused investors.
During a panel of Southeast Asian stock exchange leaders at the “ASEAN: Beyond the Pandemic crisis” forum held by Maybank in late June, Ramon Monzon, president of PSE, said that as global investors increasingly reward ESG compliance, this should raise the bar especially for PLCs.
“I think the listed companies can see that on the fixed income side, investments on the green bonds are happening in the last three to four years but on the equity side, that has not happened.”
—PSE President Ramon Monzon
The sustainability reporting requirement is a good start as this allows investors to know where each company was at the ESG compliance level, Monzon noted.
“I think, that will start attracting equity investments into these companies if we have an ESG index,” Monzon said.
ESG goes beyond concept of promoting business accountability and self-regulation through corporate social responsibility practices. ESG criteria are seen to make efforts to make a better impact on people and planet—and not just profits—more measurable.
“It’s not the be-all and endall but it’s important because it’s something where there’s enough understanding, you could persuade your listed companies to do good comparable disclosure,” Michael Syn, senior managing director of equities of Singapore Stock Exchange, said during the same Maybank forum.
“So the idea is for the market is to say [that] with the right disclosure, our marketplace will price in either a green premium or brown discount and the market will tell the company do more of these or do less of that,” he said. “It’s like accounting standards 30 years ago. It took 20 years to get IFRS (International Financial Reporting Standards) agreed upon. It will take another 10 years to get carbon accounting working. We soon have a lot of work to do but that’s a starting point.”
Sustainabilty-themed equity fund
“Sustainability is about investing in our future. The generation consisting of Millennials and Gen Z is expected to be the biggest investor market in the next decade. This new generation has made it clear that sustainability is an important factor in the way they spend and invest,” said Phillip Hagedorn, chief investment officer of local asset management firm ATR Asset Management (Atram).
Last February, Atram launched the first equity fund in the country that makes it selection on the back of the UN Sustainable Development Goals (SDGs) framework. The investment thesis is that as companies integrate more sustainability issues into their businesses and continuously improve on integration, this will drive longterm returns and reduce costs.
Atram formed this fund, which is available for a minimum participation of P1,000, on a fervent belief that institutions and the youth should have a voice in how companies build their future.
“Sustainability has become more relevant in a postpandemic environment that has waged a hefty cost on society and the economy. The fund hopes to mitigate some of these effects by incentivizing companies to continuously invest in wellness, progress and fairness as expressed in the UN SDGs. There is a need to draw inspiration from those who put welfare and responsibility at the forefront,” Hagedorn said.
“If more companies pay it forward, we can make a huge difference for the environment, society and the economy,” Hagedorn added.
Big win for climate change
Willem Sels, global chief investment officer at HSBC Private Banking and Wealth Management, said at a briefing in June that this 2021 would be a pivotal year for sustainable investments given the commitments of governments to achieve net zero carbon emissions.
“Sustainability creates new growth industries, such as electric vehicles, batteries, hydrogen and new electricity grids to adapt to solar and wind energy. The United States, Eurozone and China are trying to maximize their market shares in these new green technology industries, and this competitive race will speed up innovation and bring new investment opportunities. We believe a good strategy to incorporate ESG factors in a portfolio is through a multiasset approach.”
—Willem Sels, Global CIO – HSBC Private Banking and Wealth Management
Joe Biden’s election as the new US president is also seen as big win for renewable energy and climate change mitigation efforts. One of his first major moves as the US CEO was to rejoin the Paris Climate Agreement, which has a roadmap to prevent climate change and curb global warming.
“It’s almost a race among different governments to commit more than the others and that’s not just because they want to do the right thing or their voters are turning more into green parties and pushing them to adopt a more greener agenda. I think it’s also a race among countries to gain market share in this growing area of the economy,” Sels said.
The United States, Europe and China will want to maximize their share in the green economy, thereby creating a lot of innovation amid tough competition, he said.
Within HSBC Private Bank’s clientele, consisting of high net worth individuals, Sels said the interest on sustainability was growing, especially now that people could actually see the scientific basis of calls for better environmental stewardship.
“Clearly there is a cost and the transition for some companies is more costly than the others. But I don’t think there’s an alternative for companies, because whatever sector you are looking at— like automotives or industrials—within each sector, everybody has a competitor and if your competitor is better at making the transformation, they will see their share price outperform, in our view. Why? Because they get better employee retention, therefore [they have] better talent and they will have consumers prefer their product,” Sels said.
Even in old industries, Sels said there would always be innovations that could be done to embrace the sustainability revolution.
“Companies that are not looking at ESG at all are at risk of dying because they are going to have business models that are irrelevant,” Sels said.
“It’s a bit like the technology revolution. If you think about it, it’s obvious that those companies that are more technologically advanced are the outperformers. We think the same is going to happen with sustainability. It may take years but 2021 will be a year of acceleration of this trend,” he said.
This story was first published in the August 27, 2021 issue of the Philippine Daily Inquirer’s Road to Clean Energy special report.