The future of ESG investment in China

Business & Technology

To reach carbon neutrality by 2060, China will need to develop its domestic green finance industry, attract international investors, and improve its overseas investments, particularly within the Belt and Road Initiative.

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How ESG factors influence investment in China

2020 marked a watershed year for the global economy. The business case for a heightened focus on environmental, social, and governance (ESG) concerns is fueling a wave of responsible investment that is already becoming a mainstay in global capital markets — and increasingly so in China. Driven by greater investor demand and stricter regulatory requirements, ESG awareness, monitoring, and disclosure in China are poised to accelerate.

The foundation for sustainable investments in China was laid in 2016, when China’s central bank issued Guidelines on Establishing the Green Financial System. Since then, ESG funds and disclosures in China have grown apace. In 2019, 85% of CSI 300 companies released official ESG disclosures, up from 54% in 2013. As of June 2020, there were 47 ESG mutual funds and exchange traded funds (ETFs) in China. Their combined assets under management grew to $7.3 billion by June, up 32.3% from the end of 2019. Aside from fund management companies, banks and their wealth management subsidiaries have also been rapidly developing their ESG strategies.

The trend of increasing ESG disclosures in China is driven by two primary forces. First, large institutional investors and high-net-worth investors are actively building in-house ESG capabilities and launching sustainable investment products. Second, Chinese regulators set a goal for listed companies to make mandatory disclosures. As of July 2020, companies listed on the Hong Kong stock exchange (HKEX), for example, need to provide disclosure of significant climate-related issues, explain key ESG performance indicators, and publish annual ESG reports. In addition, President Xi Jinping has announced China’s goal to be carbon-neutral by 2060, which will further fuel the transition to a low-carbon economy.

How global trends in ESG investing affect China’s target to be carbon neutral by 2060

The 2060 carbon neutral target has set a long-term goal for China’s economic transition, and the consequent policy pressures and industrial transformation will have a significant impact on the financial market. In recent years, China’s financial regulators have capitalized on the relationship between climate change and financial stability to promote green finance. Specifically, asset managers have started to calculate the carbon intensity of their asset portfolios, and more aggressive ones have refused investment in fossil fuels. Some commercial banks are also reducing or withdrawing from business cooperation with high-carbon companies.

Peiyuan Guo, Chairman of SynTao Green Finance and the China Sustainable Investment Forum — who we’ve also profiled in the interview below — writes that “it is foreseeable that China’s 2060 carbon neutral target will prompt tightened supervision of financial regulators over climate risks to financial institutions, and financial institutions will face new regulatory requirements concerning climate risks.”

However, more work needs to be done. To reach carbon neutrality by 2060, China will need to develop its domestic green finance industry, attract international investors, and improve its overseas investments, particularly within the Belt and Road Initiative (BRI). If China is to succeed, activists are calling for China to cease financing coal plants domestically and overseas as well as to shift the business model of some of its largest state-owned enterprises, such as Petrochina and Sinopec, whose profits are based on the extraction of fossil fuels.

BCG’s analysis shows that the total cost of the effort will be substantial: 90-100 trillion RMB (or about $13.5-$15 trillion) through 2050 to reach the 1.5°C target. But this expenditure is well within China’s economic capability, and the investments are expected to have a material benefit for GDP. As more Chinese companies list overseas, foreign investors are paying more attention to the extent to which Chinese companies meet international standards, including lower transaction costs, better-quality data, and higher expectations on ESG disclosures (such as audited reports). Going forward, Chinese companies are expected to provide more comprehensive ESG disclosures and harmonize their own green finance standards with international markets, key steps toward channeling capital towards sustainable development and transitioning into a low-carbon economy.

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