Ernst & Young Li Jing: ESG Investment Strategy Under Digital Tools

Li Jing, partner of China financial services climate change and sustainable development of Ernst & young, Asia Pacific Financial Services sustainable development director of Ernst & young, shared his experience on ESG from four aspects: investment strategy, pre investment evaluation, post investment risk control and information disclosure.

First of all, what are the new explorations of investment strategy in the context of "carbon neutral" in the future? She suggested that, in addition to setting up some ESG related principles, policies, strategies, procedures and guidelines of the fund when selecting investment targets, it is also necessary to pay attention to the two sub lists - Green list and transformation list - on the premise of establishing a white list.

She stressed that it is not possible to invest funds in the backward production capacity of emission control industries, such as "two high and one surplus", but there will be projects in this industry that will produce technical effects, carbon dioxide emission reduction and greenhouse gas emission reduction. Such projects are actually very good financial investment targets for transformation.

Secondly, when doing ESG, there are several ways to evaluate before investment. The first way is to make full-time investigation by sending a full-time team. The second way is through the data given by some rating agencies. However, there is a gap between the scores of the same type of enterprises between emerging markets and developed markets under similar industries, similar enterprise scale and similar development process. Therefore, we can not completely rely on the results given by some international investment rating agencies as our investment decision-making judgment.

If so, what should be done? Li Jing mentioned that the three categories of ESG cover 30 to 36 KPIs, including different environmental, social and corporate governance KPIs. At the same time, it is also necessary to refer to the different industry standards, technical guidelines and emission requirements of local regulatory authorities under different industries and bring them into the secondary KPI.

Third, risk control after investment. She said that the risk control after investment is actually a challenge, especially for some early projects, and its risk management needs the attention of investors. We have seen that in some industries, the risks brought about by climate change are very direct financial risks, including the carbon market to be established nationwide. The carbon price will definitely have a significant upward trend from 2021 to 2030. The carbon price will rise sharply in at least ten years, which will increase the cost of enterprises. It is a very big risk, the risk of transformation. In addition, many enterprises in the development process, the level of corporate governance needs to be improved, and the risk management and control after investment is a very key link for the fund to make "carbon neutral" investment.

Li Jing suggested that investment institutions can use more digital tools and models. First, the average value of the industry should be measured. For the environmental risk of some industries, it can be reasonably judged by digital tools to obtain the industry average value in time; Second, it is necessary to manage and monitor the potential social risks of enterprises in a timely manner. Because we media are very developed, many green industries and industries are very good, and projects are also very good. However, due to poor management, complaints are often made. The risks of "s" part brought by it far exceed the positive benefits of green industries. This is for investors, It's a very big risk.

Fourth, information disclosure. Li Jing thinks that information disclosure is very important. Many funds do very well in green investment and ESG investment, but it is likely that for some capital markets, overseas LP or the public, the popularity is not so high. In fact, it has a great relationship with the systematicness and completeness of information disclosure.

For example, nine countries in Europe have adopted the climate change disclosure principles of TCFD financial institutions. At the same time, she suggests that investment institutions can learn more from and consider joining some international principles and organizations when making information disclosure, so that more LP, especially overseas LP, can recognize our contribution in the field of green investment.