Unlocking ESG opportunities

The coronavirus pandemic accelerates the interconnectedness between sustainability and the financial market, with responsible investing being on the trajectory to the mainstream. Better ESG performing companies are associated with lower risks and higher returns, which can be reflected in the company’s value. Hence, establishing a systematic approach to integrate ESG factors into fair value calculation is of paramount importance for optimizing investment strategy.

Report highlights:

• Companies with strong ESG propositions are usually associated with higher long-term sustainable growth and credit ratings, along with lower volatility.
• There is a positive relationship between the ESG disclosure score and P/B ratios. When the ESG disclosure score increases by 20 units, P/B ratios approximately rise 0.13 accordingly, within the Hong Kong-listed real estate developer sector as of October 2021.
• Material ESG factors have an explicit impact on companies’ free cash flow adjustments, influencing the operating revenues, capital expenditures and taxes, etc.
• ESG performance is closely intertwined with the discount rate, which a risk premium is applied when companies score poorly in ESG metrics, resulting in a lower present value.

Relationship between ESG disclosure scores and price-to-book ratios of Hong Kong-listed property developers