China ESG Investment: Progresses, Drivers and Issues

ESG investment has become a fast-development phenomenon in China. What are the key drivers and how sophisticated are different players? Dr Dequan Wang, founder and CEO of Governance Solution Group shares his observations.

20 July 2020

It may be a surprise to you, but ESG is among the hottest topics in the Chinese investment community these days. A total of 48 Chinese organisations have become PRI signatories and 3 quarters of them are asset managers.  Quite a number of ESG initiatives have been launched by regulators, trade associations and market players. This is a big contrast to things just a couple of years ago when the ESG concept was rarely known in China.

ATC Initiative interviewed Dr Dequan Wang, Founder and CEO of Governance Solution Group, who gave his first-hand observation and assessment as to the progresses, key drivers and major issues in Chinese ESG investment.

Dequan Wang, founder and CEO of Governance Solution Group

I think to summarise the two main drivers for the ESG investment from policy to practice in China, is from the Chinese policy makers and the international investment, international capital inflow.

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Q: ESG has been a very hot topic in the Chinese investment community. What are the main drivers behind this development trend?

  • Two main drivers: (1) Chinese policymakers and (2) Global index inclusion and global investors capital inflow;
  • The policy has clearly shifted from GDP centric to a more sustainable and balanced development approach;
  • The opening-up of the financial market also forces the top domestic managers to get ready to compete with their international peers for international mandates.
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Q: What are the main initiatives by government/regulator/trade associations/exchanges that you think have created positive momentum?

  • The central government has placed sustainable development on a very high place in the priority list since 2012-2013, and the following policy initiatives helped the market players to pay increasing attention to ESG:
  • In August 2016, PBOC, along with other ministries jointly issued guidelines about green financial systems, requiring mandatory environmental information disclosure for all listed companies and issuers in China;
  • In 2016, CSRC amended corporate governance code, emphasizing the role of institutional investors and requiring listed companies to integrate ESG;
  • In November 2018, AMAC issued green finance guidelines, encouraging asset managers to practice ESG investment.

Q: On the corporate level, how do you assess the ESG application and disclosure by Chinese listed companies, compared with their international peers?

  • Chinese issuers are still lack of awareness and guidance on how to implement ESG practises;
  • ESG information disclosure by issues is very insufficient. But it is expected that mandatory disclosure will be introduced in China in the next year or two;
  • HK market requires the issuers to disclose information almost on a mandatory basis,  which helps some companies (A+H listing) get in line with international practise;
  • Service providers assist investors by navigating the available data from other sources, including government agencies.

Q: At what stage are the Chinese asset managers in building their ESG investment capability? Where can they improve?

  • Some leading asset managers have begun to develop their own ESG investment strategy, set up ESG dedicated teams.
  • Majority of asset managers are still in the stage of knowing something about ESG but lack action.
  • Chinese asset managers tend to focus on constructing quantitative indicators and building their own rating system, taking ESG as a risk controller.
  • As a future improvement, the manager should do more in post-investment engagement.

Q: What is the role played by asset owners in China on ESG issues?

  • Different from the developed market, the development of ESG in China is not mainly pushed by asset owners.
  • Most Chinese asset owners are aware of the concept of ESG, but not in a hurry to practice ESG investment.
  • Some of the largest asset owners, for instance, the National Social Security Fund have been leading the charge in terms of introducing ESG concept and voting guidelines.

Q: Most global investors have their ESG criteria in manager selection. Are the Chinese managers ready to meet these criteria?

  • Asset managers are fully aware of the ESG criteria and challenges they are facing from global investors, many of them are already accelerating the construction of their ESG investment strategies.
  • They realised that meeting the ESG demand from investors is as important as providing the returns.
  • The managers will get really serious about sustainable investment and ESG requirements when the Chinese asset owners start to really push on sustainable investment requirements.

View the full interview video