Brief introduction of the guest and moderator
Luo Yingyu
He joined Penghua Fund in 2008 and has 17 years of experience in the securities industry, and is currently the fund manager of the quantitative and derivatives investment department of Penghua Fund, with in-depth research and rich experience in fund management in ESG responsible investment and TMT industry.
Cao Yangyang
Head of e-commerce user operation of e-commerce department of Penghua Fund
Luo Yingyu's golden sentence
1. ESG investing is a best practice that focuses on environmental, social and governance aspects, emphasizing long-term value creation and risk management, and helps identify and invest in companies that are performing well in the direction of sustainable development.
2. Our production and life are highly dependent on ecosystems. Agriculture, for example, is highly dependent on insects for pollen dispersal and pollination. If insect populations are affected, it will have a significant impact on agricultural output.
3. The degree of dependence on biodiversity varies widely across sectors. The food, livestock and daily necessities sectors are highly associated with biodiversity. In addition, sectors such as water, electricity and heat supply have a significant impact on biodiversity.
4. As an ESG investor, our goal is to identify companies with technological innovation capabilities, reasonable and sustainable business models for asset allocation in such a context of the times and the capital market.
5. As far as the domestic market is concerned, ESG investment has developed rapidly in recent years, and the scale has now reached hundreds of billions of yuan. The investment categories include equity ESG products and bond products for green transformation and green investment, providing investors with a wealth of choices.
Cao Yangyang: The theme of today's exchange is "Exploring ESG Investment: Opportunities and Challenges Behind Biodiversity". First of all, let's ask Mr. Luo, what is ESG investment, what is biodiversity, and what is the relationship between the two?
Luo Yingyu: ESG investment is a best practice that focuses on environmental, social and governance aspects, emphasizing long-term value creation and risk management, and helps identify and allocate investments to companies that are performing well in the direction of sustainable development. In recent years, both institutional and individual investors have paid more and more attention to ESG investment strategies.
Biodiversity is one of the important themes in ESG investment. In addition to general ESG investment products (such as Penghua CNI ESG300ETF), there are many thematic investment strategies, including focusing on climate change and biodiversity, which are all subdivisions of ESG-themed investment.
As the well-known saying goes, the phrase "lucid waters and lush mountains are invaluable assets" sums up the theme of biodiversity well. Biodiversity refers to the diversity of biological species that exist in time and space, including diversity at the genetic, species and ecological levels. Specifically, genetic diversity refers to the diversity of genes within a single species, which is the basis for species to adapt to environmental changes. Species diversity is the diversity between different species, such as the thousands of species of plants and animals in tropical rainforests. Ecosystem diversity involves the functional and structural differences of different ecosystem types, such as forests, grasslands, wetlands, etc. This diversity has a significant impact on human production and life, and provides a basic ecological background for sustainable development.
Cao Yangyang: That's right, it is true that "lucid waters and lush mountains are invaluable assets". What are the economic implications of biodiversity loss?
Luo Yingyu: In fact, our production and life are highly dependent on the ecosystem. Agriculture, for example, is highly dependent on insects for pollen dispersal and pollination. If insect populations are affected, it will have a significant impact on agricultural output. Similarly, the raw materials for products such as the pharmaceutical industry, especially traditional Chinese medicine, as well as biocosmetics, also come from nature. If the entire ecosystem is destroyed, the source of these products will be severely affected.
We can also often see this dependency in our daily lives. For example, traditional Chinese medicine comes from many plants and animals in nature. If these plants and animals are affected by ecology, it will have a huge impact on the production and application of traditional Chinese medicine. It can be said that the maintenance of biodiversity is essential for our production and life.
Cao Yangyang: I just mentioned that biodiversity is actually a very important aspect of ESG, and it may also have a very important impact on our ecology. In terms of investment, what are the main aspects of the investment value and opportunities of biodiversity?
Luo Yingyu: Biodiversity has both positive and negative impacts on investment. Take the example of a well-known European coffee brand, which recently proposed a sharp increase in the consumer price of coffee in Europe, as Europe imposes strict regulations and restrictions on coffee imports, prohibiting coffee from devastated rainforest regions from entering the European market. This practice provides a clear selection of coffee sources and can lead to a loss of profit for some businesses. However, it also opens up new business opportunities for other businesses. For example, companies that produce coffee in agriculturalized areas in a scientific and measured manner may reap significant commercial benefits. It can be seen that the impact of ESG investment on companies is a two-way street, with some companies likely to benefit and others to suffer.
The impact of biodiversity on production and life can also be felt all around us. In the case of the fishing moratorium in the South and East China Seas, these measures aim to protect the reproduction and growth of marine life. During the fishing moratorium, consumers may find an increase in the price of fish products, especially seafood. But in the long run, these initiatives are sustainable for the long-term survival of humanity. Especially as we become more and more dependent on marine products, these measures can ensure the sustainable development of fish stocks in the future.
For ESG and biodiversity investment, some companies may be affected in terms of production and commercial interests due to the policy and the background of the times. Others that are in tune with the trend of the times may reap huge benefits. As an ESG investor, our goal is to identify companies with technological innovation capabilities, reasonable and sustainable business models for asset allocation in such a context of the times and the capital market. This can not only obtain commercial benefits, but also provide a guarantee for the sustainable development of mankind.
Cao Yangyang: The case of coffee and the fishing moratorium really made me understand at once what is biodiversity investment. It can be seen that biodiversity is very important for the sustainable development of our humans, plants and animals, and when it comes to the conservation of some biodiversity, can you introduce to our investors what relevant initiatives are currently being taken at home and abroad?
Luo Yingyu: I have noted that there are many important global initiatives and agreements on environmental protection, climate change and biodiversity. In the field of climate change, the Kyoto Protocol and the Paris Climate Agreement are common declarations and goals among countries around the world. These global agreements have been concretely implemented in the mainland as the "dual carbon" goal and the "3060" goal, that is, to achieve carbon peak by 2030 and carbon neutrality by 2060.
In recent years, we can clearly feel the dramatic changes in the field of new energy and non-fossil fuels. The rapid development of photovoltaics, wind power and new energy vehicles are all concrete manifestations of climate change-related industrial policies and actual conditions. These changes have not only affected our daily lives, but also brought new opportunities to the investment market.
In the area of biodiversity, the core global body is the Conference on Biodiversity, which is held every two years. The mainland joined the organization back in 1994 and hosted the 15th General Assembly in 2021. At this conference, the important "Kunming-Montreal Global Biodiversity Framework" was formed, which clearly defined the path of global biodiversity conservation. The core elements of the framework include the establishment of about 30% of nature reserves and the development of policies related to food waste. At present, these global resolutions are being gradually implemented on the mainland.
The continent has also taken many concrete measures to implement biodiversity conservation. For example, in 2021, we have established five national national parks, including Sanjiangyuan National Park and Hainan Tropical Rainforest. These initiatives are similar to the national park system in the United States and are concrete practices for biodiversity conservation. The establishment of national parks is not only conducive to ecological protection, but also creates conditions for the development of ecotourism and other related industries.
It is noteworthy that the next biodiversity conference will be held in Colombia on 21 October this year. As investors, I think we should keep an eye on this conference as it could have a significant impact on related industries and investment opportunities. Biodiversity conservation has become a global focus, and the introduction of relevant policies and measures may have a profound impact on many industries, including agriculture, pharmaceuticals, tourism, etc.
Cao Yangyang: It is true that our country has made a lot of efforts in the conservation and development of biodiversity, and has also assumed very important responsibilities, which reflects the demeanor of our great country. Just now you also mentioned that the sustainable development of humans, animals and plants is an eternal theme of the times, and enterprises may have to follow the trend to have better development, what is the very important role of biodiversity in the operation of enterprises? What are the main aspects of it?
Luo Yingyu: The impact of biodiversity on business operations is multifaceted.
First, many industries such as paper and food production are highly dependent on biodiversity from a revenue, cost and cash flow perspective. In the case of food production, for example, the yield of crops such as wheat, rice and maize is closely linked to biodiversity. The cultivation and reproduction of a single species often leads to declining yields, so companies need many different genetic sources to optimize category decay. The establishment of biological seed banks in China is to preserve biological genetic diversity and provide resources for the future development of mankind. For these companies, both revenues and costs are highly correlated with biodiversity, affecting their long-term profitability and growth.
Second, from the perspective of balance sheet and equity, biodiversity has a significant impact on corporate image and goodwill. Many companies are investing heavily in biodiversity and climate change topics, enhancing their overall brand image and tone. This image of sustainable development not only enhances corporate equity, but also strengthens the confidence of shareholders and investors, and increases the value of investment.
Third, from the perspective of investment and financing, biodiversity and climate change have had a significant impact on financing costs in recent years, both in China and in Europe and the United States. For example, Europe and China have clear policy guidelines in these areas, such as green finance norms, which have a significant impact on companies' competitive advantage. High-performing companies can access financial resources at a lower cost, increasing shareholder value and dividend payout.
Europe and the United States have launched a dedicated biodiversity index, focusing on companies with outstanding biodiversity performance. These indices have attracted hundreds of billions of asset allocations, greatly increasing the value of related companies and lowering their financing thresholds. These are the real returns that biodiversity brings to businesses and their shareholders.
Cao Yangyang: It sounds like biodiversity actually affects all aspects of business development. So, how can companies manage some of the risks associated with biodiversity? And how to improve the related capabilities?
Luo Yingyu: As a shareholder, we should pay close attention to the actions and progress of enterprises in biodiversity management. While this topic may have received less attention in the early days, it has received a high level of attention in recent years, both domestically and internationally.
Businesses need to assess the positive and negative impacts of biodiversity activities on themselves, consciously and strategically avoid negative impacts, and capture the business opportunities brought by biodiversity in a timely manner. It is important for companies to take advantage of the industrial policies and opportunities of the times.
In the case of food production, for example, the yield and quality of food are closely related to biodiversity. Businesses can meet this challenge by developing environmentally friendly and sustainable agroecology. At the same time, we are seeing the emergence of innovative technologies such as meat analogues that can help companies reduce their impact on biodiversity.
As we mentioned earlier about the impact of coffee on the European market, many companies can consciously develop a sustainable, biodiversity-friendly business model to enhance their intrinsic value.
Cao Yangyang: When it comes to ESG investment, I am very curious, what is the process of ESG application in investment practice? Can you give us some specific examples?
Luo Yingyu: ESG investment is an investment best practice, which is valued by more and more asset management institutions. In my opinion, there are two main core approaches to ESG investing: active and passive.
Proactive ESG practices include assessing the financial value of a business as well as ESG opportunities and risks before investing. In the case of biodiversity, we need to consider how to meet market demands, such as the growing demand for food in Europe, while protecting the environment. At the same time, we need to pay attention to risks, such as the impact of livestock on greenhouse gas emissions, the degradation of land nutrients and the degradation of species productivity.
We also need to consider the gains and losses for our stakeholders. For example, farmers may face increased costs in biodiversity conservation, but may reduce future costs in the long run. Another example is that the mainstreaming of artificial meat may affect the interests of livestock farmers. Therefore, we need to comprehensively assess the impacts of climate change and biodiversity issues on different companies, and integrate these assessments with investment decisions that balance both business interests and sustainable development.
In portfolio management, in addition to focusing on risk and return, we also need to evaluate the performance of the entire portfolio in terms of ESG and sustainability. This assessment can be used to make quantitative decisions in a quantitative way.
Passive investment is mainly reflected in thematic investment products. In China, investors are more familiar with climate change-related topics, such as new energy, new energy vehicles, photovoltaic and wind power, etc. In terms of biodiversity, there are already relevant passive products in the European market, and similar products are expected to appear in the domestic market in the future.
Yangyang Cao: Through the case you just cited, it is indeed easier to understand the investment in biodiversity. I found that there are many industries involved, such as animal husbandry, new energy, and manufacturing, but how dependent are different industries on biodiversity?
Luo Yingyu: The degree of dependence on biodiversity varies greatly among different industries. The food, livestock and daily necessities sectors are highly associated with biodiversity. In addition, sectors such as water, electricity and heat supply have a significant impact on biodiversity.
In the case of hydropower facilities, for example, the construction of dams will have a significant impact on the population reproduction and living environment of aquatic organisms. To this end, many large water conservancy facilities have set up special connecting channels to meet the needs of biological populations.
In fact, biodiversity is closely related to many aspects of human production and life, including air, soil, oceans and freshwater resources. The impacts of biodiversity are multifaceted and vary from business to business.
Cao Yangyang: You mentioned earlier that there will be some products abroad that specifically invest in biodiversity. From a domestic perspective, what are the current practices of ESG funds and biodiversity-themed investment?
Luo Yingyu: ESG products can be divided into two categories: general ESG products and thematic ESG products. Generalized ESG products incorporate ESG factors into investment analysis and selection to form an overall investment strategy.
There are three main types of thematic ESG products:
1. Climate change products: including new energy, new energy vehicles, photovoltaics, wind power and other industries in the direction of future industrial development and technological innovation, as well as carbon neutrality, carbon emission reduction and other topics. Such products have attracted much attention in domestic ESG investment and have achieved significant scale development.
2. Biodiversity products: This is a relatively mature subdivision in Europe, mainly focusing on biological and ecological environments. Although it is still in the early stages in China, it is expected to become an important investment direction in the future.
3. Impact investment: This type of investment combines capital influence with commercial interests, similar to the investment method of charitable foundations, but pays more attention to the balance between commercial returns and sustainable development.
These three types of products are currently the mainstream passive investment products in the world. As far as the domestic market is concerned, ESG investment has developed rapidly in recent years, and the scale has reached hundreds of billions of yuan. The investment categories include equity ESG products and bond products for green transformation and green investment, providing investors with a wealth of choices.
Source: wind.
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