ESG (Environmental, Social, and Governance) investments are on the rise. It’s not just institutional investors who are incorporating ESG into their decision-making; an increasing number of individual investors are recognizing its importance too.
However, whenever ESG topics are discussed, questions often arise, with some viewing ESG as mere marketing jargon. The primary challenge lies in the subjective definition of ESG. Different investment firms have varying benchmarks for ESG, leading some companies to engage in “greenwashing”, deceptively using green to marketing their investment products. Without proper oversight, ESG could be stigmatized, potentially disrupting the fund flow into green finance.
Green Finance Transparency
In the last two years, the European Union (EU) has been continuously updating regulations related to green finance. This includes requiring investment companies to categorize their funds as deep green, light green, or zero green, based on certain criteria. The EU’s objective is not to define what ESG is for fund companies or determine the extent of their green investments. Instead, they aim to increase transparency, making it easier for investors to understand the details of how fund companies select their stocks with regards to ESG.
In simple terms, the EU mandates that all funds disclose how ESG risks impact their investment decisions and returns, even for zero green funds, which must explain why they believe ESG risks are irrelevant. This move is estimated to drive the entire capital market toward green finance, so even zero green funds need to engage and reflect regularly.
Light green funds encompass those that incorporate ESG stock selection strategies into their investment decisions, but “sustainable investing” is not their primary goal. Light green funds that promote their environmental and social characteristics must disclose how they achieve these features. Finally, deep green funds are those with a clearly stated investment objective of “sustainable investing.” Fund managers for deep green funds must provide a clear explanation of how they meet these objectives.
Responsibility of Investment Companies
In addition to green classification, under the EU’s “Sustainable Finance Disclosure Regulation,” investment companies have an obligation to publish a “Principal Adverse Impact” report on their investment portfolios at the end of each June. This report enables investors to easily track various ESG indicators within the fund company’s portfolio, including factors such as carbon emissions, the proportion of renewable energy usage, and the impact of a company’s operations on biodiversity, among over ten other factors.
As of the end of the first quarter of this year, when calculated by asset size, deep green funds constitute 3.2%, while light green and zero green funds account for 53.8% and 42.9%, respectively. The EU’s categorization is expected to deepen investors’ understanding of “green” and help those genuinely interested in ESG find better targets.
This document is based on management forecasts and reflects prevailing conditions and our views as of this date, all of which are accordingly subject to change. In preparing this document, we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources. All opinions or estimates contained in this document are entirely Zeal Asset Management Limited’s judgment as of the date of this document and are subject to change without notice.
Investments involve risks. Past performance is not indicative of future performance. You may lose part or all of your investment. You should not make an investment decision solely based on this information. Each Fund may have different underlying investments and be exposed to a number of different risk, prior to investing, please read the offering documents of the respective funds for details, including risk factors. If you have any queries, please contact your financial advisor and seek professional advice. This material is issued by Zeal Asset Management Limited and has not been reviewed by the Securities and Futures Commission in Hong Kong.
There can be no assurance that any estimates of future performance of any industry, security or security class discussed in this presentation can be achieved. The portfolio may or may not have current investments in the industry, security or security class discussed. Any reference or inference to a specific industry or company listed herein does not constitute a recommendation to buy, sell, or hold securities of such industry or company. Please be advised that any estimates of future performance of any industry, security or security class discussed are subject to change at any time and are current as of the date of this presentation only. Targets are objectives only and should not be construed as providing any assurance or guarantee as to the results that may be realized in the future from investments in any industry, asset or asset class described herein.
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