Author: Nan Luo, Head of China, UNPRI
ESG investing has become a very hot topic in China especially in the past year. It started to appear in mainstream conference agendas and a lot of communications. The accelerated uptake of the concept also evidenced by the growing number of PRI signatories in China, with the number increased to 18 from last year’s 7. It’s particularly encouraging to see the move of the long-term Chinese investors with China’s first insurance and largest asset manager-China Life Asset Management recently becoming PRI’ Signatory to start the ESG journey.
The growing momentum is both driven by domestic and international factors. Domestically, ESG investing closely aligns with China’s National priorities of transforming to high quality and green development. Internationally, the ESG rating of the Chinese listed companies as a result of the inclusion of China A-shares into MSCI’s emerging market index plus the signal from the global asset owners for ESG incorporation have been pushing Chinese listed companies and asset managers to pay attention to this new topic.
Notably, China’s policy and regulatory landscape have been developing fast in response to the change. Following the well-known high-level policy guidance on Establishing Green Financial System led by the Central bank and jointly issued by seven Ministries in 2016, there has been improved environmental information disclosure by listed companies as a result of the joint regulation by China Security Regulatory Commission (CSRC) and the Environmental Ministry. And according to CSRC, ESG information disclosure will become mandatory for all listed companies by 2020. Institutional investors are now also in a justified position for being more active to engage with the listed companies on ESG matters following the release of the Revised Corporate Governance Code for Listed Companies by CSRC and the Green Investment Guidance released by the Asset Management Association of China (AMAC) affiliated to CSRC later this year.
Though momentum is strong, ESG investing is still at the very early stage of development and facing some fundamental challenges including the following:
There’s a lack of systematic and in-depth understanding of why doing this and what it is really about and means. In many cases, ESG is more interpreted as taking social responsibility rather than thinking from the financial i.e. risk and opportunity angle as the starting point. It’s also easily understood as thematic investing. Therefore, there’s a big concern for scarifying returns.
The role of domestic asset owners/long-term investors on the value chain to incorporate ESG and therefore drive for ESG incorporation along the chain at large are still missing.
ESG investing as a strategy and practice supporting, in particular, the long-term value creation is facing a challenge to be incentivised to be applied and integrated into the investment analysis if the financial performance is short-term driven and measured. It’s true for China in particular as the capital market is still dominated by the retail investors who are pursuing short-term profit.
Lack of meaningful ESG data is another big barrier to enable ESG investing practice. Especially, study and understanding on ‘Materiality’ need to be built, and not only for ‘E’ but also for ‘S’ and ‘G’ factors.
ESG investing is a journey and takes time to become sophisticated, but development could continue moving fast in China with improved awareness and understanding by different stakeholders and technological enablers. Chinese investors have experienced real pain from financial loss due to the neglect of the non-financial ESG factors which have material financial implications. The Changsheng Vaccine scandal happened this year is a live example of this. The benefits of doing ESG investing will be gradually understood by investors with improved data and evidence.
But to build and make the ESG investing ecosystem work properly, communications between especially policy makers/regulators, investors and listed companies and also importantly with the international community to understand each other’s interest and concerns are really needed and key.