ESG Investing is on the Rise as Investors Realize Good Environmental Practices are a Good Proxy for Strong Management and Higher Profits

By Si Jun Lee

According to August 2017 reports by Bank of America, “ESG” investing has grown by more than 97% globally in the past 20 years. ESG investing refers to the practice of using environmental, social, and governance criteria to screen and select companies for investment. Environmental criteria consider how a company manages its environmental resources and responsibilities; social criteria look at the company’s impacts in the communities where it does business; and governance criteria examine a company’s corporate structure and transparency.

While ESG investing was traditionally viewed as a niche investment strategy for the socially-conscious crowd, more mainstream investors are coming to the realization that strong ESG performance is an indicator of strong and effective management. CEOs that act responsibly in managing environmental impacts also approach other factors in their business in a more sustainable way, which means their business are more profitable over the long-term and deliver better returns to their investors. A 2014 study by the firm CDP found that companies that plan for environmental changes achieves return-on-investment (ROI) that is 18% higher than companies that do not plan for environmental change, and 67% higher ROI than companies that refuse to disclose their emissions.
BofA estimates that the amount of assets managed under ESG funds have gone from less than $100 billion in 1995 to $8.72 trillion in 2016, and women and Millennials investors are the two primary groups driving the sharp increase. A recent survey by Nielsen indicates that 90% of Millennials and 80% of women investors show an interest in ESG strategies, and are willing to pay extra for sustainable offerings.

Increased interest in ESG strategies has not gone unnoticed by corporate boards. Most global companies now issue Corporate Responsibility reports. Many mid-size companies are also starting to incorporate ESG considerations, to some extent, in their business planning.

But despite the progress, there are still significant barriers to ESG investing. One is the lack of uniform and comparable ESG reporting data. While many companies offer Corporate Responsibility reports, they often cover different issues and rely on different metrics. If the growth in ESG investing continues on the same trajectory, however, it is likely that the marketplace will adapt to develop more uniform and reliable standards as companies compete for a bigger share of ESG investment dollars.

The Paris Climate Agreement Math, in Terms a NY Real Estate Developer can Understand

By Si Jun Lee

The $100 billion Green Climate Fund figure at the center of the Paris Agreement has been singled out for criticism by both supporters and critics alike.

On one hand, President Trump’s assertion that the Green Climate Fund will require the U.S. to pay “billions and billions and billions of dollars” while “many of the other countries haven’t spent anything, and . . . will never pay one dime” is inaccurate.

First, the Green Climate Fund is an outgrowth of the 2010 Copenhagen Climate Agreement.  It stipulated that 37 developed countries plus the European Union would “mobilize”—not “give”—a combined $100 billion in climate finance to developing countries by 2020.  That figure, however, includes only $10.3 in direct aid from developed countries, with the rest coming from private investments and voluntary contributions from other countries.   When the Paris Climate Agreement was signed in 2016, the total amount “mobilized” was already at $66.8 billion, with little coming from direct aid.  Second, other countries are paying as well.  The U.S. committed $3 billion of direct aid, but only paid $1 billion before President Trump reneged on the remaining $2 billion commitment.  According to the Green Climate fund’s Pledge Tracker, the majority of countries that pledged funds under the Agreement have already paid in full.  Others have paid significant sums as well: the UK $770 million, Japan $750 million, Germany $500 million, France $450 million, Canada $187 million, etc.

On the other hand, there is some truth in the sense that the financial burden has been uneven.  China and India have not committed any funds, and it is also no secret that the reason many developing countries joined for the Paris Agreement may well be to get a slice of the $100 billion pie, as evidenced by the Climate Action Plans submitted by developing countries uniformly requesting financing for action.  From a common sense perspective, a focus on climate change at the moment makes little sense for countries like Yemen, which is currently struggling with the aftermath of a long civil war and crippling hunger and disease epidemics.  Yet Yemen signed on to the Paris Climate Agreement and submitted a Climate Action Plan ahead of schedule, indicating it could institute programs to reduce its carbon emission by 1-14% conditional upon obtaining international financing for its climate program.  Despite the fact that the Green Climate Fund invests in specific projects and does not distribute money to countries for self-implementation, there is still some skepticism that—without strong oversight on a local level—there is a risk that funds intended for climate programs could dissipate through graft and corruption in some countries.

This does not mean, however, that the U.S. decision to walk away from the Agreement was financially wise.  The pre-Trump U.S. approach in supporting the Green Climate Fund is a strategy that President Trump should understand well from the real estate world.  It was designed to leverage a small direct investment to raise a substantially larger sum from other players for a global project that it could not—and should not have to—finance on its own.  The international goal of mobilizing $100 million by 2020 once seemed reachable, even with a relatively low commitment of direct aid from the U.S.  President Trump’s withdrawal now sends a strong signal akin to a lead investor pulling out of a real estate development deal at the last minute.  The U.S.’s departure won’t help convince China and India to do more (unless they see economic opportunities in the power vacuum).  Worse yet, it sounds the alarm for other private investors to pump the brakes on climate projects around the world.

While President Trump’s decision saved the U.S. $2 billion in short term cash, this pales in comparison to what the U.S. stands to lose from continued climate change.  According to a September 2017 study by the U.S. Government Accountability Office (GAO), U.S. agricultural, health, and labor sectors all suffer measurable economic impact from global emissions in other countries.  In addition, spending to respond to climate-change related natural disasters has cost the U.S. over $350 billion in the last decade.  And these costs are rising rapidly as climate change becomes more accelerated.  The GAO report, in fact, urged the Trump administration to take action to protect the environment before it starts costing the country more money in the long term.  Ironically, the Green Climate Fund was a way for the U.S. to accomplish exactly this goal… largely using other people’s money.

Zero-waste cities will be the reality soon:  Is that a good thing?

By Si Jun Lee

Zero Waste is a philosophy that encourages use of recycling, reusing, and composting to divert waste from being sent to landfills or incinerators.  The movement originated in the mid-1980s, when PhD chemist Paul Palmer founded Zero Waste Systems in California with the goal of finding new homes for most of the chemicals being excessed by the electronic industry.  In the last 10 years, however, the movement has transitioned from theory into action.  A number of large U.S. cities—including New York, Los Angeles, San Francisco, San Jose, Seattle, Austin, etc.—have already adopted plans to work toward zero waste.  Companies like Thrive Market, Subaru, Xerox, and Anheuser-Busch are also moving toward zero-waste manufacturing plants.

There are obvious benefits associated with zero waste, such as reduction of negative environmental impacts like climate change, air pollution and the waste of precious resources. Less obvious are economic benefits such as additional jobs for recycling and diversion services.

But is zero waste truly possible?  Sure, there are models like the Japanese town of Kamikatsu, where there are no garbage trucks and the 1,700 residents must sort their trash into 34 categories before bringing it to the recycling plan themselves.  But what about urban cities like New York, and San Francisco?  One way that some large cities are achieving “zero-waste” is by using waste-to-energy (WTE) methods—essentially, burning trash as fuel for generating power, instead of coal, oil, or natural gas.   In China, WTE is viewed as a low-cost renewable energy strategy, and the Chinese government is building the largest WTE plant in the world, that will turn a third of Shenzhen’s trash into energy every day.  Similarly, New York, with non-existent local landfill space, aims to achieve 90% of waste diversion, by relying on WTE to dispose of 25% of their waste.  Other cities, like San Francisco, do not view WTE as an acceptable part of a zero-waste plan.  In achieving 80% diversion rate for waste, San Francisco processed less than 1% of its waste through WTE.  However, it is uncertain whether San Francisco will be able to continue working towards true “zero waste” without greater reliance on WTE.

Some experts question whether WTE is the right solution, due to the possibility that it would generate harmful residual pollutants in the air, land, or water.  For residents living near WTE plants, this is a grave concern.  In Shenzhen, construction of the largest WTE plant—located just north of the city’s major drinking water reservoirs—was met with protests by several dozen residents fearing air and water contamination from the ash, wastewater, and airborne pollutants of the incinerated waste.

Until zero-waste cities become the norm, there is little hard scientific data to either validate or refute these fears.  Use of WTE as part of a zero-waste strategy can be a solution, or it can be another big problem.  Thus, the question is no longer, can large cities achieve zero-waste?  The question is, how?