How sustainable are your investments?

Learn to invest
Green finance

Author: Mr Chin20/09/2021

Knowledge first, then action. As people become more environmentally conscious, sustainability has become a part of our daily lives, impacting how we spend and even how we invest. When I invest in a company, in addition to its fundamentals, I would also consider its sustainability.

Sustainable investment is a new concept different from the conventional idea of investment. When identifying a company for investment, investors need to consider non-financial factors including the environmental and social aspects, with the aim of improving the risk-return profile while also benefiting the environment and society as a whole. ESG (Environmental, Social and Governance) is a more commonly discussed sustainability concept.

More: Understanding different sustainable investing concepts

In the old days, most of us were only concerned with a company’s business and financial performance before making an investment decision. However, with the increasing impact of climate change on the economy and financial markets, environmental and climate-related risks have undoubtedly become a source of financial risk for companies, and there is a genuine need to understand how companies are performing in the ESG arena. In this regard, a company’s ESG disclosure becomes important in providing investors first-hand information.

Listed companies in Hong Kong are required to publish their ESG reports annually to inform investors of the company’s ESG policy, relevant factors that have a significant impact on the company and how it manages the associated risks and opportunities. From such ESG reports, investors can learn of the sustainable development and long-term value of the company.

Climate change is an important topic of ESG. When reading an ESG report, we can look at the material risks that climate change poses to the company, for instance financial-related risks from operational and supply chain disruptions; or transitional risks, which are risks that arise during the transition into a low-carbon economy. Transitional risks can come from changes in policy, laws and regulations, technologies and the market.

It is often said that you have to do your homework when it comes to investing. For this very reason, reading the company’s annual reports, including the financial reports and ESG reports, is indispensable.