First, forgive my provocative title for this blog. In an attempt to attract your attention I have condensed and oversimplified several important steps of logic!
I spent the month of July traveling across Asia, a region that uses three times more resources than the rest of the world to create each unit of GDP. During this time I was struck by major policy shifts in China; the launch of the carbon trading pilot schemes and the China green banking policy being two notable proponents of China’s recent transformation. I visited several other countries and finished my trip in Singapore, where the haze from forest fires in Indonesia had transformed the relatively pristine air to intense smog hazardous to human health. Environmental issues were therefore quite visible. I was honoured to be the guest of the Singapore Stock Exchange, where I presented to a large audience of senior company executives the argument that companies in Asia have an opportunity to differentiate themselves and demonstrate good governance by reporting clearly on environmental and other sustainability issues. I emphasized the need for integrated reporting. I then met with several companies and investors to understand their view of reporting. It was through the course of having these meetings that I was struck by the logic of this blog:will increase your share price.
Hypothesis 1: Asian companies can stabilize, and even increase, their share price by attracting foreign shareholders Asia is home to many of the world’s growth companies. These companies often seek to access capital by listing on one of the Asian exchanges. A listing means that a company’s shares can be freely traded and this provides liquidity. In many Asian markets a high percentage of shares are owned domestically by retail investors. This is especially true of China where 80% of traded shares are owned by retail investors. This is not a bad thing as retail investor can provide significant liquidity. Retail investors vary greatly in their sophistication and approach, however, and can sometimes be driven by sentiment rather than fundamentals. This is why companies often complain that, in spite of rising profits, their share price remains depressed. I was told, however, that the cure for this malaise is to attract foreign investors. Foreign owners tend to hold on to their shares for longer than domestic retail owners and this supports the share price and reduces volatility. Lower volatility increases the equity value, so there is a self-reinforcing benefit for the share price.
Hypothesis 2: Foreign investors will increasingly scrutinize the governance of companies Investors, especially investors who originate from Europe and the United States, are increasingly scrutinizing companies’ environmental performance. A recent survey by the Global Investor Coalition on Climate Change found that 70% of asset owners said climate change factors influenced their fund manager decisions in 2012. They are seeking ‘responsible’ companies who are better governed and generate fewer environmental and societal costs while providing superior returns. These companies are good investments – with less risk, greater opportunities and a more secure long-term license to operate. In order to identify these companies, investors are demanding clear reporting of information beyond the normal financial statement. This is the reason I believe the work of the IIRC, and others seeking to improve disclosure, is so important.
Conclusion: Asian companies that are well governed and report well will attract foreign investors and improve their value Taking the two previous hypotheses together, it appears that it is desirable to attract foreign investment because it can positively affect the share price and in order to be included in the ‘universe’ of potential investments it is important to demonstrate how your company is well governed, has made efforts to measure and manage its environmental impact, has good labour practices and is seeking a positive impact on society. Against a backdrop of intensifying regulation and resource vulnerability, companies in Asia that take the lead in demonstrating sound management of these issues will be best placed to succeed in the transition to a resource efficient, green economy.