The Path to Sustainable Development: Insights from Recent ESG and Climate Change Events

ESG Webinar with Professor Ethan Rouen

On January 10, 2023, Professor Ethan Rouen, an Assistant Professor at Harvard Business School, led an enlightening webinar on measuring corporate impact and the current state of Human Capital Disclosures within the context of ESG (Environmental, Social, and Governance) reporting.

Professor Rouen began by emphasizing the diverse terminology used in corporate reporting, with some companies referring to their reports as CSR (Corporate Social Responsibility) reports, others as ESG reports, and some using entirely different labels. This reflects the broad scope of ESG, which encompasses environmental, social, and governance issues.

Rouen introduced a classification of firms into four categories based on their impact on equity holders and non-equity stakeholders, emphasizing the importance of making for-profit companies generate positive value for both groups. He discussed the environmental impact of firms, highlighting that those with lower emissions tend to be more efficient.
Addressing the cost of mitigating environmental impact, he mentioned that it can be substantial, particularly for energy and airline companies. Measuring product impact on the environment is challenging but critical, focusing on factors like quality, emissions, and recyclability.

Rouen commended companies like Toyota and Volkswagen for their efforts in low emissions vehicles, particularly electric vehicles. He also noted that the financial technology industry attracts significant impact-related investment, driven by promises of financial inclusion and cybersecurity.

In evaluating the social aspect of ESG, Rouen identified two dimensions: community and employee. Companies that provide fair wages and working conditions can generate substantial positive employment impact. He discussed the shift in perspective on employment from an expense to an investment.

He highlighted regulatory changes in the EU related to human capital disclosure, emphasizing the importance of firms disclosing information related to recruitment, turnover, and compensation. This shift in disclosure led to market reactions and investor interest in human capital-intensive firms.

Rouen delved into the concept of pay ratios, distinguishing between fair and unfair pay disparities. Research showed that firms with higher unfair pay performed worse, while those with fair pay disparities performed better in terms of accounting and market performance.

Finally, he presented research findings on the impact of turnover and internal promotions on stock performance, demonstrating the benefits of low turnover and high internal promotions.

ESG Webinar with Professor Bruce Usher

On February 21, 2023, Professor Bruce Usher from Columbia Business School conducted a webinar addressing the implications of climate change on investments. He emphasized that the world is undergoing a 30-year process of decarbonizing the global economy, which will disrupt businesses and change investor behavior significantly.

Usher identified five major trends driving climate change: physical risks like extreme weather events, evolving social norms favoring sustainability, government policies to combat climate change, technological innovations such as electric vehicles, and increased investor focus on ESG factors.

He discussed the impact of climate change on various industries, including the real estate sector, where rising sea levels have led to decreased property values in coastal areas. Additionally, he highlighted the influx of capital into agricultural technologies and the declining investment in fossil fuels.

Usher noted that while renewable energy can replace current energy consumption and decarbonize a significant portion of global emissions, the other half will require more commitment and effort from both governments and businesses.

He emphasized the importance of addressing two types of risks: physical risks associated with climate change and transition risks related to regulatory changes and consumer preferences. Usher also highlighted the concrete returns that ESG investments can generate for investors.

The geopolitical landscape is shifting in response to climate change. Despite the Ukraine war prompting some European governments to reopen coal mines, the deployment of renewable energy is accelerating globally. The International Energy Agency predicts that renewable energy will surpass coal power generation by 2030, five years earlier than previously expected.

The “Inflation Reduction Act” passed in the U.S. has heightened geopolitical competition related to climate change. China is leading in manufacturing, while the U.S. leads in innovation. Sectors like batteries, green hydrogen, and direct air capture technology offer opportunities for new market entrants.

Companies with remaining emissions may turn to carbon offsets. However, the carbon credit market lacks clear regulations, and many projects may not genuinely reduce emissions. Resource scarcity is a challenge, particularly for materials used in climate solutions like lithium and cobalt. Advanced Small Modular Reactors (SMRs) nuclear technology could become competitive in the future.

Green Development Working Session

In June 2023, AmCham China organized the Green Development Working Session, bringing together experts and business representatives to discuss the role of corporations in China’s green and low-carbon development.

Claire Ma, Vice President of AmCham China, emphasized the significance of China’s dual carbon target, signaling a shift towards a sustainable economic model. Li Yuanyuan discussed China’s efforts to synergize pollution alleviation and carbon reduction, highlighting the importance of the circular economy in resource utilization.

Professor Gao Yuning discussed corporate green transformation in the context of the Sustainable Development Goals (SDGs) and ESG development. He emphasized the need for internationally harmonized ESG standards and a customized approach to sustainability indicators.

Violante di Canossa from UNDP emphasized the importance of a just transition in the low-carbon era and highlighted UNDP’s work in promoting green transition in China.

These three events shed light on the evolving landscape of sustainable development, climate change, and ESG investments, emphasizing the need for global cooperation, clear regulations, and innovative solutions to address pressing environmental and social challenges.