1. Introduction
This seminar illustrated the New World Development Company Limited's strategies in ESG and green finance. In introducing the company's core business, Mr. Lau gave an example of how the SV2030 strategy, green and healthy building projects, sustainable financial instruments, community involvement, and creative methods help the company accomplish the UN's sustainable development goals. This highlighted the company's achievements in social responsibility, reputation enhancement, and performance improvement. We can observe that ESG is a quantitative measure of a company's capacity and level of responsibility from the New World Development example, and it is starting to play a role in investment choices and business operations.
Furthermore, from a business perspective, companies have to allocate diverse kinds of resources to different projects due to resource constraints. This means that as attention to some goals increases, it decreases for others, creating a trade-off between different objectives (Nason & Wiklund, 2018). Based on this kind of logic, companies should maximize profit by allocating as many resources as possible to create greater benefits for themselves. However, businesses must devote some resources to social responsibility, such as donations, supporting charities, and environmental preservation, due to government restrictions and reputational issues. Past studies have shown that investing resources in social responsibility can affect profitability, leading companies to choose fraudulent practices (Besley & Ghatak, 2007; List & Momeni, 2021). Meanwhile, other studies suggest that business goals and strategies are diverse, and performance indicators like employee welfare and social reputation may impact the company's overall benefits (Widener, 2006).
Overall, companies have proposed long-term decisions between maximizing profit and social responsibility. The emergence of ESG provides a way to quantify corporate social responsibility, which further enhances the impact of social responsibility on corporate financing, operations, and performance. More social responsibility may bring more tangible benefits to companies, hopefully, in the end, changing them. Therefore, this report believes that the development of trends like ESG and green finance will promote corporate social responsibility, further improve corporate ethical systems, and reduce the opposition between corporate performance and social responsibility. Consequently, this will lead to new investment trends like ESG and social-ethical investment, which aim to benefit investors in different ways and bring more opportunities to the industry. At the same time, it will also play an important role in improving overall social welfare, and the resource allocation between the government and the market will change.
Analysis
2.1 ESG and Its Role in the Asian Market
ESG, an acronym for Environmental, Social, and Governance, originated in the early 2000s when international society began to focus on corporate social responsibility and sustainable development. It assesses a company's non-financial performance, especially its impact on the environment, social responsibility, and internal management structure. Over time, ESG has become a crucial tool for investors assessing long-term corporate value, especially in sustainable development and social responsibility investment (Halbritter,2015). The ESG concept originated from ethical and responsible investment practices (Michelson et al., 2004). With the rise of the green environmental movement in the 1960s and 1970s, more people began to embrace green and environmental ideologies. Due to the continuous growth of cross-border investments by corporations, financial institutions, particularly commercial banks, have realized that labor protection and community development expenditures could affect project real returns, which help determine a company's ability to repay debt. As a result, investors and consumers have become more willing to forgo some profits or pay certain costs to support businesses that use environmentally friendly technologies and improve worker protection.
In the Asian market, ESG has evolved from initial recognition to widespread acceptance. Initially, Asian businesses paid less attention to ESG compared to Western countries. However, as global interest in sustainability grew and the demands of investors and consumers for corporate social responsibility increased, ESG's status in the Asian market rose significantly. Today, many Asian companies actively adopt ESG standards, and investors increasingly value corporate ESG performance, making it an essential measure for corporate assessment and investment decisions in the region.
In the field of sustainable development, Asia has seen steady progress in recent years. For instance, according to a World Economic Forum report released in June 2023, China ranked 17th among 120 countries in the energy transition index, entering the top 20 for the first time. The data from the International Energy Agency shows that China added 160GW of renewable electricity capacity in 2022 and is expected to account for about 55% of the global increase in renewable energy capacity this year and next. At the same time, governments worldwide are increasingly investing in and prioritizing sustainable development.
In terms of government support in Asian countries, Figure 1 shows Singapore's expenditure on sustainable development and environmental affairs since 2006. Such spending has been fluctuating and on the rise in recent years, with a significant surge occurring in 2017. This suggests that the development of ESG has entered a phase of policy dividends.
When talking about the government's efforts to allocate resources for sustainable development, Asian investors start to recognize that ESG investing can help reduce and diversify risks in investment. Asian regulatory bodies are also making efforts to strengthen and clarify the criteria and transparency of ESG ratings and data providers in order to establish a rating system to promote healthy market development. For example, the Hong Kong Securities and Futures Commission announced advocacy for a code of conduct for ESG rating and data product providers in Hong Kong to be voluntarily followed. This code will be developed by an industry working group and align with best international practices suggested by the International Organization of Securities Commissions and other major regions. The code aims to enhance the transparency, quality, and credibility of ESG information, aiding fund companies in the assessment of ESG rating and data product providers. Besides Hong Kong, South Korea also released ESG assessment agency guidelines in May, and Japan and India have introduced regulatory frameworks for rating providers. This indicates an expanding focus on ESG and green investments in the Asian market.
2.2 The Impact of ESG on Businesses
As the importance of social responsibility becomes increasingly prominent, environmental, social responsibility, and corporate governance are collectively regarded as the three dimensions of a company's sustainable development. These aspects are being integrated into businesses' operations and decision-making processes.
Based on its importance, many organizations and countries have introduced policies to support this trend. Therefore, this section will outline the development of ESG regulations worldwide. ESG regulations first originated from the attention of governments and economic organizations on corporate sustainable development and financial security. The introduction of the Equator Principles in 2003 significantly increased financial institutions' focus on the social investment benefits for clients. It also highlighted factors such as board structure, compensation systems, and business reputation, which influence long-term operational stability. In 1992, the UNEP Finance Initiative (UNEP FI) recommended integrating ESG factors into financial institutions' business decisions. Subsequently, numerous Non-Governmental Organizations (NGOs) and third-party organizations actively promoted ESG concepts, including the U.S. Sustainable Accounting Standards Board (SASB), integrating ESG-related sustainability metrics into accounting standards. Following the implementation of these various regulations, the impact of ESG on businesses has become increasingly evident at a practical level.
Before the ESG became a metric for sustainable development, its impact on businesses was often categorized under "corporate social responsibility"(CSR), addressing the non-material aspects of corporate operations. Precisely, corporate social responsibility is a topic of significant interest in both academia and the business world. The increasing resource consumption is considered detrimental to business development. At the same time, it can provide a better business environment and gain more support from the government and society. Thus, the concept of CSR impacts all aspects of a business, including corporate value, financing, and performance. Regarding the highly focused issue of corporate value, there are three perspectives on the impact of CSR: positive correlation, negative correlation, and no correlation. Surroca et al. (2010) and Kim et al. (2014) support the positive correlation hypothesis, suggesting that proactive environmental strategies or CSR activities attract qualified employees, enhance reputation, strengthen stakeholder interactions, and reduce business risks by lowering capital costs, ultimately optimizing financial value. In contrast, Vance (1975) and Lerner (1994) propose a negative correlation. McWilliams and Siegel (2001) argue that there is no relationship between CSR and corporate value. Thus, ESG provides a quantifiable measure of corporate social responsibility, which potentially influences the relationship between CSR and actual business benefits.
In addition, the increasing demand for better ESG performance and sustainable development capacity in businesses has contributed to determining if a company has the motivation for sustainable development. Particularly in the present new era of socio-economic development, if improved ESG performance can lead to increased market value and reduced financing costs, then investing more in sustainable capacity building will become a voluntary choice for businesses. Conversely, forcing companies to enhance ESG performance through administrative orders may have a negative effect on their enthusiasm, which adversely affects the sustainability of the economy's green transformation.
Moreover, financing is a crucial aspect of business operations. A company's social reputation can significantly impact its financing costs and the difficulty of obtaining financing. Recent studies have shown that environmental aspects, social responsibility, and corporate governance can reduce a company's financing costs. Ashbaugh et al. (2004), using the Standard & Poor's database, found that financial transparency, audit committee independence, and board independence lower the cost of equity financing. In contrast, Dimson et al. (2015) and Cheng et al. (2014) pointed out that corporate spending in ESG areas effectively reduces total financial costs. Lastly, Ghoul et al. (2015) examined the global relationship between corporate ESG performance and company market value in 53 countries, finding that better ESG performance does reduce financing costs, especially in markets with poorer environments and weaker institutions.
Regarding the relationship between ESG disclosure and corporate financing costs, we come up with various empirical research conclusions. Krüger (2015) found that investors' reactions to corporate ESG information depend on the quality of the information; the clearer the ESG information disclosure, the more likely investors are to respond. Meanwhile, Ho and Taylor (2007) concluded that ESG information disclosure is negatively correlated with corporate capital liquidity in a study of American and Japanese listed companies. Brammer et al. (2006) differentiated the quality of ESG information disclosure, suggesting that differences reflect varying corporate operational motives, thus affecting corporate value differently. Fatemi et al. (2017) argued that since the "Social Responsibility Report" is the main channel for corporate ESG information disclosure and lacks unified guidelines in content and methodology. Since most of the information released is qualitative and lacks quantitative indicators, it is hard to rule out certain businesses that are "whitewashing" their reports in order to hide their actual low ESG performance.
More importantly, as ESG first emerged, it has also had an impact on the main indicator of success that businesses prioritize. Current research is divided into two camps. Neoclassical economic theory suggests that corporate ESG investment has strong externalities, and managers may use it as a self-serving tool. Therefore, corporate ESG performance is negatively correlated or unrelated to business performance (Ruhaya et al., 2018; Duque-Grisales et al., 2021). On the other hand, corporate ESG disclosure improves relationships with stakeholders and builds a positive perception of corporate social responsibility. Furthermore, it continues to improve the company's reputation in addition to enhancing transparency and lowering financing costs by resolving agency issues and information asymmetry. Therefore, corporate ESG performance is positively correlated with business performance (Fatemi et al., 2015).
2.3 New Opportunities ESG Brings to Investors and Governments
For investors and governments, ESG creates new challenges and opportunities. As individuals, we can engage in investment activities or provide suggestions and references for government actions. Therefore, this section will explore how to apply the new opportunities observed in ESG, as seen in New World Development Co. Ltd., and past theories and practices into practical scenarios.
For investors, ESG investing has become a new opportunity for economic growth. Globally, ESG is becoming a strategy of leading asset management institutions. Among the top 50 asset managers worldwide in terms of AUM, 43 of them have become members of the United Nations-supported Principles for Responsible Investment (PRI), focusing on their commitment to sustainable investment. In 2022, the global ESG fund market, led by Europe, reached a total size of $2,497 billion, with 7,012 ESG funds in total. Europe, the US, and Asia (excluding Japan) rank as the top three regions in ESG fund size, accounting for 83.22%, 11.45%, and 2.04% of the total, respectively. In Asia outside Japan, mainland China's ESG funds account for 68% of the region's total.
Recently, the scale and number of China's ESG funds have grown significantly. From 2020 to 2022, the number of ESG funds surged from 44 to 125, showing an increase of 184%. The cumulative fund size rose from 594.87 billion yuan to 1,101.27 billion yuan. As of the end of March 2023, China had 144 ESG funds with a total size of 1,176.67 billion yuan, including 92 active funds with a size of 967.48 billion yuan and 52 passive funds totaling 209.19 billion yuan.
Therefore, as investors, the inherent focus of ESG on regulation, reputation, and responsibility also provides a richer and safer investment environment. The Global Sustainable Investment Alliance (GSIA) has proposed seven ESG investment strategies. These include strategies for impact and community investment, corporate governance participation, international norms screening, negative and positive screening, sustainable theme investment, and ESG integration strategy. As a practical investor, it is beneficial to consider these strategies in order to pursue more sustainable investments (Vartiak, 2017).
For governments, there is a need to strengthen the regulation of the ESG market. On the other hand, they should seize opportunities to utilize the momentum of ESG investments for social development and efficiency improvement. Governments should use industrial policies like subsidies and carbon taxes or monetary and other financial policies to guide funding toward sustainable investments. In addition, they ought to raise the price of non-compliance with ESG investments for companies by instituting different information disclosure requirements.
3. Recommendations
Current research on ESG and sustainable development highlights several areas for future exploration. Firstly, deeper empirical studies are needed to understand the long-term impact of ESG practices on corporate profitability and market valuation. ESG is an emerging concept, and current research on its impact on businesses, investors, and governments remains largely focused on the short term, with less exploration into long-term equilibrium. Therefore, once long-term data becomes available, investigating the influence of ESG as a measure of social responsibility will be of greater significance.
At present, the effectiveness of government policies and incentives in advancing corporate ESG practices is not fully understood, and the role of governments in ESG implementation remains unclear. The establishment of a general equilibrium framework linking investors, businesses, and governments is still lacking. Future research should start from the perspective of public policy evaluation to assess the effectiveness of current ESG regulations and explore new regulatory frameworks to enhance corporate accountability and sustainability, focusing on the role of governments in ESG development.
Moreover, current discussions on ESG investment and green finance are predominantly limited to economic, financial, and management perspectives. However, integrating insights from economics, environmental science, and social sciences could provide a more comprehensive understanding of ESG's role in sustainable development. As mentioned earlier, ESG is a comprehensive concept covering various aspects of sustainable development. Therefore, future research should combine methods from economics, energy studies, political science, urban planning, and other fields to explore the diffusion effects of ESG across different regions, communities, and industries within an interdisciplinary framework.
4. Conclusion
This report examines the impact of ESG on various aspects of business operations and financing. Its main focus is on New World Development Company Limited's integration of ESG and green finance into its core business. The report continues to talk about how ESG, being a quantifiable CSR indicator, has the potential to change the way markets operate. The report also highlights the need for a balance between profit maximization and social responsibility. It examines how ESG is increasingly influencing investor behavior and government policy, particularly in Asian markets. It further highlights the evolving government regulatory environment, the growing focus on sustainability, and the potential impact of new ESG regulations on the market. According to the research, the emergence of ESG as a new quantitative indicator of social responsibility has the potential to drastically change how businesses are financed, what their goals are, how they operate, and how they measure profitability. This could change how businesses behave to reduce potential fraud tendencies, as well as offer new opportunities for sustainable growth. The changing investment environment also presents challenges for individual investors and regulators. Thus, future research should focus on ESG's long-term and comprehensive impact, which is optimizing public policy channels to achieve market Pareto improvements through ESG.
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