To The Moon

Hi Tigers,

Recently, I asked a friend at a dinner party：Do you know what ESG is ?The friend is very excited, blurt out: EDG slays in the game !The whole dinner was quiet for at least three seconds...If you are still confused about ESG and EDG, you should read this article carefully.

I will tell you what ESG is in the simplest way.

1. What is ESG?

First, let's talk about the concept of ESG.ESG stands for Environmental, Social and Governance.The concept of ESG was first proposed by the UN Global Compact in 2004.

It gives ESG more explanation:

"E" mainly focuses on the environment;

It covers pollution emissions, the use of natural resources such as energy and water, the impact of business activities on the environment and resources, greenhouse gas emissions, carbon footprint, biodiversity and so on.

"S" focuses on the social dimension;

It covers employee welfare and health, supply chain management, product responsibility, social welfare and so on.

"G" focuses on corporate governance;

It covers the composition and power norms of directors, supervisors and senior managers, risk management and internal control, investor relations, executive compensation, corruption and so on.Reading this, many friends may have the first impression of ESG as "environmentally friendly", "social responsibility" and "corporate governance".

Of course, this understanding is correct, but we can not help but have such a question in mind, how much is the relationship between ESG and investment?

Don't worry, let's first understand what ESG is.

2. How To Understand ESG?

You know, investing is two-dimensional; the first dimension is the return, and the second dimension is the risk. The principle of traditional investment is to take the minimum risk under a certain return, or to obtain the maximum return under a certain risk.Now, the emergence of ESG standards has added a third dimension to traditional investments, which is "sustainability."That is to say, we should not only find the investment method with the highest performance-price ratio of return and risk, but also enjoy this performance-price ratio for a long time in the time dimension.Here, I will give you a common example in life.Many of my friends, like me, have had the idea of finding a boyfriend at a party. What do we expect from a boyfriend at an arranged party?Here, I sum up my long-term love experience, and I divide this expectation into two perspectives.

First, the angle of love.Second, the angle of marriage.

Let's talk about the angle of love first. What do you expect when you meet your future boyfriend for the first time?I think, roughly be these a few: the appearance condition of the other side, salary income, domestic capital, speech deportment.

These elements are actually the first and second dimensions, also known as the "fundamental" elements. From a relationship point of view, whether you are satisfied with the "fundamentals" determines whether you choose to associate with this boy.Investing is the same as picking a target. The "fundamentals" of a company determine whether we should start investing in it.So how to solve the next marriage problem? Love may be impulsive, but marriage needs to be "sustainable".To answer this question, we need to introduce ESG standards. This is tantamount to introducing "ethical" standards in addition to "fundamentals."So, your expectations for this boy become these points: whether he loves animals, whether he has environmental awareness, whether he has a sense of social responsibility, and whether he is loyal.

At first glance, these "moral" standards seem to have nothing to do with the boy's salary, speech and appearance, but they have an important impact on the long-term marriage life in the future.

Similarly, ESG standards have nothing to do with the "fundamental" factors of enterprises themselves, and short-term ESG ratings will not have a decisive impact on the performance of enterprises, but from the perspective of "sustainability", enterprises with higher ESG ratings may have better future development.

Next, let's talk specifically about the impact of ESG standards on investment.

3. Is ESG Useful For Investment?

Many investors may ask, ESG is a standard to show a company's "ethics" or "sustainability", so will a company with a higher ESG rating have an advantage over other companies in terms of return on investment and investment risk?Tiger_Academy tells you that research has found that there is.According to a report by the Center for Sustainable Business Research at New York University Business School, more than half of the more than 1000 research papers from 2015 to 2020 found that ESG factors had a positive or neutral impact on financial performance.

Among them, 71% of the studies found that the impact of ESG factors on corporate financial performance (ROA, ROE, stock price) is positive or neutral; 59% of the studies found that the impact of ESG factors on investment performance (portfolio alpha, Sharpe ratio) is positive or neutral.

Morgan Stanley's Sustainable Reality study found that among nearly 11000 mutual funds from 2014 to 2018, ESG's investment performance was not significantly different from that of traditional funds. However, ESG funds have less market risk, and their downside risk is 20% lower on average than traditional funds.

According to the subsequent updated data, in 2019, the excess return of ESG equity fund is 2.8% compared with traditional equity fund, and the excess return of ESG bond fund is 0.8% compared with traditional bond fund; in 2020, the excess returns of ESG equity fund and ESG bond fund are 4.3% and 0.9% respectively.

(Source: Whelan, Atz, Van Holt and Clark (2021))

In addition, the research results of West China Securities Research Institute show that ESG investment strategy is more effective in emerging markets and can achieve excess returns.

From the lowest point in February 2009 to March 2021, the cumulative increase of MSCI Emerging Markets Composite Index is as high as 408.5%, which is much higher than the 251.2% increase of MSCI Emerging Markets Index in the same period, and the gap between them has been increasing in recent years.From the current research results, ESG factors do have more advantages than other companies in terms of return on investment and investment risk.At this point, you should be able to understand what ESG is and what ESG does for investment.

To put it simply, ESG gives listed companies more requirements such as "environmental friendliness", "social responsibility" and "corporate governance" in traditional fundamental investment, and adds "sustainable" indicators to listed companies to guide listed companies to pay attention to environmental protection and enhance social responsibility while pursuing their own performance and scale.

ESG factors have a positive impact on corporate finance and investment. Compared with the general means of investment, ESG investment has stronger excess returns and lower downside risk.Picking a company is like picking a boy.

If the "fundamentals" are excellent and you have a high "moral" standard, why don't you be moved by such a company and a boy?My friends, welcome to leave your heart story in the comment section and share your "dating" experience ~

See you next time ~