ESG Increasingly a Factor, But Winners Are More Than That

Zooming in on Chinese companies' developments in ESG and its factor in stock performance in an interview with Frank Gong.
Nov. 23, 2021 09:19
ESG Increasingly a Factor, But Winners Are More Than That

(CapitalWatch, Nov. 23, New York) ESG factors are increasingly considered by investors when it comes to identifying growth potential – and some of the fastest-growing stocks are innovators in green energy spheres. However, the best-performing stocks are found at an intersection of several key factors, of which ESG is one.

High ESG Score as Performance Factor

To name a few, consider Microsoft Corp. (Nasdaq: MSFT), which is up 58% year-to-date, EV titan Tesla Inc. (Nasdaq: TSLA), up 56% y-t-d as of Friday, Irish IT company Accenture (NYSE: ACN) that is up 44% y-t-d, and other big gainers named by Investor's Business Daily in a recent report titled "100 Best ESG Companies Combine Superior Stock Ratings With Social Values. IBD gave these companies high Composite Ratings, with Tesla scoring a 99 out of 99, Microsoft at 98, and Accenture at 97.

Dow Jones gave Microsoft an ESG score of 76.3, placing it first on the list of 2,360 public companies for its energy, risk, and employee management. Looking at another scale, the MSCI rated Tesla and Accenture at an "average" and also named Microsoft an "ESG leader."

However, while some analysts are bringing forth the companies' ESG criteria and using them in investment strategy, recent research by the Financial Times finds that – yes, ESG stocks are outperforming – but statistically, this only applies in Europe. Annually, according to the report, European ESG stocks outperform by 12%. But in the United States, the outperformance of stocks scoring highly on the ESG factor – while they're outperforming by 40% – is invalid when other factors such as industry and high-tech are taken into account.

Among Chinese Stocks, ESG in Nascent Stage

Turning now to Chinese stocks, as CW is, after all, about bridging China and Wall Street, investors have some concerns on ESG factors there. China has been very reluctant on disclosing corporate ESG data. However, as investment firm Cambridge Associates wrote in a September report, companies in China are increasingly becoming accustomed to the Western practice of submitting sustainability reports. As China continues to open up its markets and invite foreign capital, it's no doubt the practice will become more common. Already, this year has witnessed an increase in sustainability disclosures among U.S.-listed Chinese stocks.

Earlier this year, MSCI ESG Research ranked China 47th out of 50 countries in the MSCI All Country World Index (ACWI) and gave the nation a median Industry-Adjusted Score of 2.9 out of 10. Further, the MSCI ranked just 1.9% of Chinese stocks as "ESG leaders" with a high score. Top players like Tencent (OTC: TCEHY; HKEX: 0700) and Alibaba (NYSE: BABA; HKEX: 9988) have scored just an "average" on the MSCI ESG scale.

Yet there are noteworthy exceptions that come from the electric vehicle sector. Last month, Chinese EV maker XPeng (NYSE: XPEV; HKEX: 9868) outdid Tesla in sustainability. The company released its first ESG disclosure showing its developments in improving vehicle safety, employee environment, and corporate governance. On MSCI's scale, XPeng is indeed rated with an "AA" and got the title of the "world's highest-rated auto manufacturer" from Citigroup.

At Forefront of New Energy Wave

This goes in line with China's initiative to boost ESG transparency and the nation's general shift to a greener future. Earlier this year, the China Securities Regulatory Commission (CSRC) proposed to include a clause on ESG in companies' annual and semi-annual regulatory filings. And on many fronts, a lot more is going on to improve ESG practices.

The COP26 summit earlier this month brought to surface the nations' frustration over inadequate measures taken toward sustainability worldwide. While President Xi Jinping caused some mayhem by not showing up, China has laid out plans to reach peak coal consumption by 2025 and committed to increasing sources of new energy to reach net zero carbon emissions by 2060.

CapitalWatch has talked to Frank Gong, former Chief China Economist and chairman of China Investment Banking at JPMorgan Securities (Asia Pacific) Ltd., who is now a shareholder of multinational electric vehicle maker Iconiq Motors. Asked about China's advancement on the ESG front, Gong said: "Growth has to be sustainable, especially on the environment and climate change fronts." 

As China, the world's biggest consumer of energy and biggest emitter of carbon dioxide, continues to grow its economy, it has no choice but to push for environmentally-friendly practices. China is also the biggest auto market in the world. Because of this, "the new energy sector is going to have more space to grow than any other sector in China," according to Gong. Hence, the market is booming – and it will be decades before it stabilizes or hits a ceiling.

Iconiq emerges at the intersection of several key markets in today's global economy: new energy, automotive, and TMT.

"China is on the way to become the largest economy," Gong said. "The momentum is irreversible – in my view – in terms of the China growth story, although we have and we may continue to experience some bumps on the road."

The "bumps" include the current shortage of semiconductors and the disruptions in the supply chain. However, Gong said – and many experts have expressed similar views – that the issues were a result of the pandemic and are short-term.

Gong also expressed hopes that, as China and the United States are working out the issues on the regulatory front to ensure better transparency and disclosure, the miscommunication and misunderstanding in the markets should subside and boost investor sentiment toward Chinese stocks.

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