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investments

The ESG Movement

Aprile 12, 2021 by Ariya Morbiato Leave a Comment

Going green has never been more difficult, or has it?
ESG investing, meaning environmental, social, and governance investments investing, aims at investing in companies that strive to make the world a better place.
If we take a quick leap to the past, to the thriving 1950s, the possibility of going green not only was not a priority but also a far vision.
Whereas this year, the pace of green change has profoundly accelerated as a byproduct of the pandemic. Just think about shopping; instead of there being 40 people driving to the shops, there was one single Amazon van delivering the goods straight at your doorstep.

Reasons

Many reasons lie behind the big wave of the ESG movement; while some investors want their money to go towards companies and projects that will have a positive effect on the world, others just want to minimize the harm that their investments have on communities and ecosystems. There is also a third group that takes advantage of ESG principles to protect their own portfolio from potentially negative impacts.
However, it is essential to remember that all ESG investors want to make a return on their money no matter the motivation.

The dilemma

Nonetheless, this is much harder in practice than in principle. Consider the following example, how do you decide whether a company deserves the halo of being classified as ESG friendly?
If you look at Tesla that makes electric cars that are better for the environment than the traditional ones, you would think that this investment would positively impact the environment.
But this is not straightforward. What about the environmental impact of mining nickel which Tesla uses in its batteries? And is the electricity used to charge your car coming from renewable or non-renewable sources? Tesla has also stated that it made a $1.5 billion investment in Bitcoin, which is, as Bill Gates observed, an environmentally damaging activity because of the energy required to mine Bitcoins. So, what should you do? Do you buy Tesla shares or not? The answer is not so clear-cut. However, these days most people don’t have to make that decision. As a matter of fact, there has been a rise in passive investing that means that most investors choose an index tracking fund like an ETF (Exchange Traded Fund) or a mutual fund which puts their money into a basket of companies stocks that track an index to create an ESG focused index.
This means that the companies present in that basket have met specific criteria that define them ESG friendly.

The criteria

But how is this established?
This is still up for debate, yet the numbers of indices that provide an ESG focus have definitely exploded from 2019 to 2020, increasing by 40% according to the Index Industry Association survey. In fact, the amount of money invested ESG assets has also increased in the US wherein 2016, there were $8.1 trillion in professionally managed ESG assets according to the Forum for Sustainable and Responsible Investment, and by 2020 that number grew to $17.1 trillion, which is more than a 100% increase in just four years.
Regarding who establishes which companies to put in those indices, there are many index providers that rely on different metrics that score companies based on their ESG score. What are the metrics that are considered?
ESG impact examples of metrics are factors like exposure to carbon-intensive operations, energy efficiency, human rights concerns, etc.
Nevertheless, there can be differences between the rating agencies even if they’re scoring the exact same company. Generally, index providers have a committee that helps make decisions on which companies to include and which to exclude. This is quite important because the companies’ stocks they include will actually benefit from more investor cash. However, the subjectivity of classification has led to controversy over whether some funds are genuinely investing in companies that fulfill the vision of ESG or whether some index providers are merely using it as a marketing term and putting the ESG label on funds that don’t really deserve it. This is why it’s fundamental for investors to cautiously read the methodology and perspectives behind an ESG index before they invest in it to ensure that what they are investing in actually mirrors their final goal and intent.

Final remarks

But are the returns of these ESG funds better or worse than traditional investments?
In this chart showing an ESG fund’s performance versus a standard fund, you’ll notice that they perform pretty much in parallel to one another.

Of course, this is just one example; some ESG funds may do better than the benchmark and others that may do worse, but the beauty of ESG is that in general, investors don’t need to worry about sacrificing performance for the common good. Maybe this is why so many investors are joining this “green wave”.

Filed Under: Uncategorized Tagged With: ESG, finance, green, investments

CAI: the Comprehensive Agreement on Investments

Febbraio 8, 2021 by Ariya Morbiato Leave a Comment

After seven years of negotiations, China and the European Union laid the first stepping stone towards a long-awaited investment treaty that promises to open up the Chinese market to European companies. The Comprehensive Agreement on Investments (“CAI”) is the most ambitious agreement in terms of market access, fair competition, and sustainable development that China has ever concluded with a third country, said Valdis Dombrovskis, the EU’s trade commissioner. 

THE OUTLINE OF THE CAI

One of the main issues with the CAI was to find principles that would reflect both the spirits of the two parties, China and the European Union. Only having an alignment of values allows building the foundation upon which they can aspire to create an efficient and lasting cooperation and increase the bilateral investments that can most definitely help the EU recover from the economic collapse that covid caused.

The European Commission has released the document that summarises the result of the negotiations of 30 December 2020, reminding however that it is to be considered as ad referendum, meaning that it is not a legal text, but it is subject to finalization of details and further modifications deemed as fundamental by the two parties to be bound by this agreement.

In the preamble, both parties reaffirm their full commitment to the Charter of the United Nations (26 June 1945) regarding the principles articulated in the Universal Declaration of Human Rights (10 December 1948). Both sides have also agreed to promote investment to support high levels of environmental and labor rights protection, including fighting against climate change and forced labor.

Regarding this last part, there has been quite a controversy. In fact, Reinhard Bütikofer, chair of the European parliament’s delegation for relations with China, defined the agreement as a “strategic mistake.” He tweeted that it was “ridiculous” for the EU side to try to sell as “a success” commitments that Beijing has made on labor rights in the deal. Also, rights activists are still scrutinizing the deal closely over allegations that China uses Uighur Muslims detained in large numbers in Xinjiang province as forced labor. Beijing, however, denies these claims.

 The document then focuses on several different topics:

  • Market access and investment liberalization
  • Level playing field (state-owned enterprises, forced technology transfers, transparency in subsidies)
  • Domestic regulation
  • Transparency in standard-setting
  • Financial services
  • Sustainable development
  • State to state dispute settlement mechanism
  • Institutional and final provisions

NEW MARKET ACCESS

The principles stated in the document seem to positively respond to the requests made by the EU upon China, facilitating the way for a never before seen level of access for EU investors in the China market. EU investors will be allowed to set up new companies in key sectors.

The elimination of quantitative restrictions, equity caps, and/or joint venture requirements in various sectors will level the playing field for EU companies in China. This will provide rules to discipline Chinese SOE (state owned enterprises that make un 30% of China’s GDP) behavior, thus guaranteeing transparency in subsidies and facilitating sustainable development.

By binding China at an international level, the CAI will enhance and protect foreign investors’ rights and interests.

In other words, this agreement makes the conditions of market access for EU companies independent from China’s internal policies. Besides, the CAI parties have agreed to establish a unique dispute resolution settlement mechanism in case of any breach.

CONCLUSION

In principle, the conclusion of the CAI negotiations is a turning point in EU- China relations. But we must remember that this is only the first stepping stone towards a new market; the text has not been finalized, and it must be adopted and ratified by all the parties involved.

Filed Under: Uncategorized Tagged With: CAI, China, EU, investments

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