Sustainable investing is still in its infancy in China but for some pioneering asset owners it has considerable promise, especially if Chinese companies begin to embrace the policies that help underpin it.

APG Asset Management, one of the largest pension asset managers in Europe, claimed a first on Monday by announcing that it had partnered up with Guangzhou-based E Fund Management to offer a China A-shares equity strategy that incorporates sustainable and responsible investing criteria.

The strategy is designed for APG’s pension clients, rather than as a mutual fund, a spokesperson for E Fund told AsianInvestor, and is the first offshore A-share investment strategy to incorporate environmental, social and governance (ESG) considerations. It is unlikely to be the last.

“ESG investing is gaining traction for China investing and I wouldn’t rule out more [such strategies] coming in the pipeline,” Janet Li, director of investments for greater China at Willis Towers Watson, told AsianInvestor.

But there are a few key hurdles to overcome, mainly an insufficient awareness of ESG issues among A-share companies and paltry levels of ESG disclosure.

AsianInvestor emailed APG to ask how it would overcome the information gap and integrate ESG factors into the new strategy.

In a written response, Ronald Wuijster, APG's acting chief executive, said “we will make financial analysis to the companies we want to invest into and consider ESG criteria during the process. From a risk management perspective, we will add sustainable and responsible investment strategies to understand and measure the risks and opportunities companies are facing”.

Onshore precedents

APG’s ESG-linked strategy is not the very first such approach. A few existing onshore mutual funds have applied different ESG factors over the course of several years. The first was a socially responsible fund launched by AEGON-INDUSTRIAL Fund Management in March 2008, Rachel Wang, director of Chinese fund manager research at Morningstar, told AsianInvestor.

The fund has some criteria it must apply when selecting stocks such as corporate governance, product safety and protections for employees. It can access much of this information from public sources or through due diligence, Wang said.

Despite such encouraging precedents, the A-share market still lags developed markets in terms of the sort of information disclosure that is critical for ESG assessment, she added.

Wang Jianzhou, chairman of the China Association for Public Companies, said at a June forum focused on responsible investing in China that it’s still very early days when it comes to the study of sustainable development in Chinese listed companies, and that the companies’ awareness of ESG issues is highly mixed but generally low.

While some listed companies have established mature systems to monitor sustainable development, others just have very little awareness, Wang said in his speech (which is posted on the Asset Management Association of China's website).

But the situation is improving, according Claudia Kruse, managing director for sustainability and governance at APG.

“We are glad to see an increasing number of Chinese companies are making more efforts on information disclosure of their ESG performance," she told AsianInvestor via email. "Those disclosures are really important, especially when international investors want to understand better about ESG doings of these Chinese companies.” 

Better returns

When asked about the expected return of the new ESG strategy, APG’s Wuijster said adhering to ESG itself can’t directly bring about outperformance. So it would be vital to combine ESG criteria with other investing strategies and methods “to balance the return and risks and help us to locate better investment opportunities," he said.

Although the evidence is not conclusive, several studies show that ESG investing can generate better returns in the long term, even for emerging markets.

Yu Hua, chairman of Morgan Stanley Huaxin Fund Management and also chairman of Amac’s international business committee, told the audience at the same June event Wang spoke at that the MSCI Emerging Markets ESG index, which utilises ESG considerations, can offer 4% alpha on top of the broader MSCI Emerging Markets index. However, he didn’t provide the time range for the study.

There are currently 26 ESG-related indexes in China, of which 21 are related to environment, with the other five related to social or governance, according to Yu. If an investor had constructed an ESG portfolio comprised of the stocks in these 21 indexes, it would have generated an annualised return of 11.3% between 2010 and 2016, Yu said. That is much higher than the 5.07% of the A-shares CSI 500 index. 

ESG-themed investment strategies have already gained a lot of traction with investors. Currently, about $50 trillion of assets are invested into global equities, with another $50 trillion in global fixed income. Assets linked to global responsible investing strategies, including unlisted companies, stand at $23 trillion.

But only about $500 billion of that resides in Asia, Yu said. Still, it's growing fast, having expanded at a compound annual growth rate of 90% between 2012 and 2016, he added.