ESG investing (sometimes also referred to as “socially responsible investing,” “impact investing,” or “sustainable investing”) refers to investment which prioritizes environmental (E), social (S), and governance (G) considerations. Increasing numbers of investment professionals believe that ESG factors have a material positive impact on the long-term risk and return of investments. Companies that use ESG standards are more conscientious, less risky and are more likely to succeed in the long run.
Funds focusing either primarily or exclusively on ESG investment have become a global trend. In Taiwan, there are already twenty-one (21) ESG-themed funds with a total of NT$110.2 billion (approximately US$4 billion) of assets under management. To date, five (5) additional investment trust companies have applied to launch ESG funds totaling another NT$100 billion (approximately US$3.6 billion).
ESG Investment Information
Prudent investment decisions depend on having reliable, accurate information. In the ESG investment world this information largely comes from two sources: (i) private ESG rating and research companies and (ii) the target companies or funds themselves through public, government disclosure requirements.
Private Information Sources
MSCI, Sustainalytics, and CDP are some of the more well-known ESG ratings agencies worldwide. Bloomberg, S&P, and Moody’s and some of the larger accounting firms have their own ESG rating systems as well.
Each agency has its own specific approach. However, target companies are evaluated on the same basic ESG criteria, including:
- E: Climate change, renewable energy, and general environmental sustainability;
- S: Employee diversity, labor relations, and conflict minerals;
- G: Management structure, board independence, and executive compensation.
Another source of information and validation of an organization’s commitment to ESG considerations is certification as a B Corporation by B Lab. B Corp certification indicates that an entity has met high social sustainability, environmental, and accountability performance standards. Some notable certified B Corps are Ben & Jerry’s and Patagonia. (Winkler Partners is itself a B Corp and is active in B Lab Taiwan.)
In addition to private agency ratings and certifications, many jurisdictions have public ESG disclosure requirements for companies and investment funds. Taiwan’s Financial Supervisory Commission promulgated eight (8) principles to guide ESG disclosure (the “Requirements”). According to the Requirements, ESG funds in Taiwan must disclose:
- The investment target and criteria. ESG funds must set a measurable sustainability investment target (the “Target”). Investment trust companies must also disclose the key focus of the fund, how it focuses on sustainability, and the ESG criteria they employ to make investment decisions. They must disclose how ESG criteria are implemented and measured, and how such criteria are associated with the ESG funds’ investment focus.
- Investment strategy and method. ESG funds must explain the investment strategies used in order to achieve their Targets. Each fund must explain how ESG criteria are applied in its investment process and how it weights various ESG criteria.
- Investment portfolio and proportion. ESG funds must disclose the minimum proportion of the fund’s net asset value that is dedicated to ESG related investments, and how the overall use of the fund’s assets can be ensured to not affect their ability to meet their Targets.
- Benchmark. If an ESG fund has set out certain ESG benchmarks, such funds must disclose features of the benchmarks and the relationship of the benchmarks to the investment Target.
- Elimination policies. ESG funds must disclose any elimination policies, i.e., any criteria used to determine assets or companies in which the fund would not invest.
- Risk factors. Appropriate risk factors must be disclosed in relation to the investment focus of the ESG funds.
- Due management and participation. ESG fund management policies must be disclosed along with information on how to access the fund’s management report.
- Regular disclosure. After an ESG fund is launched, the investment trust company should disclose to investors annually (within 2 months after each financial year) on the company’s website regarding its regular evaluation.
For ESG funds established prior to the publication of the Requirements, disclosure must be made within six (6) months after the publication of the Requirements (i.e., by year end 2021).
As noted above, Winkler Partners is itself a certified B Corporation and very much involved in the ESG investment movement. In fact, we were the first legal service provider in Asia to become a B Corp and the seventeenth company in Taiwan to be certified. We look forward to working with new and existing clients on how to improve their ESG performance and execute innovative ESG investments.
If you have any questions or require additional information on ESG initiatives or investments, please contact Greg Buxton at firstname.lastname@example.org.Written October 8, 2021 By Gregory A. Buxton, Bryan Tan, Ming Teng.