Asset owners in China will be better able to evaluate external managers’ adoption of environmental, social and governance (ESG) principles thanks to guidelines proposed on Friday (July 13), said industry participants.

“It’s a good move for China. It will for sure make asset managers strengthen their ESG philosophy and implementation in their [investment] process," Janet Li, Hong Kong-based wealth business leader for Asia at consultancy Mercer, told AsianInvestor.

Green investment concepts can help fund managers choose good-quality stocks and will be instrumental in improving the governance of listed companies, a spokeswoman at China Asset Management told AsianInvestor.

The consultation paper from the Asset Management Association of China (Amac) outlines the desirable underlying assets for green investments and how fund managers of the strategies should be supervised (see also box below). It also encourages managers to offer green investment services to asset owners. The deadline for comments is next Monday (July 23).

The guidelines will be applicable to mutual funds, private equity funds and funds of funds (FoFs), and are important for driving industry adoption of ESG and responsible investing, said Amac, a self-regulatory body that represents the fund industry in China.

The consultation paper said fund managers should assess their green investments at least once in a year – either internally or using external parties – and submit the results to Amac.

NEW REFERENCE POINT

Fund managers are divided into three types based on the evaluation. Type 1 indicates that the fund managers fully adhere to the guidelines, type 2 companies follow only the main points, while those under type 3 only take the guidelines as reference.

There is nothing like this in place right now, Li said, so the guidelines will provide a reference point for asset owners to use when assessing external managers’ approaches to ESG. 

Janet Li, Mercer

The lack of an accepted framework may help explain why institutional investors in the region are divided on how to approach the topic.

The ChinaAMC spokeswoman said the firm was still studying the impact of the assessment and declined to comment on this area.

There has been a sudden and strong pickup in momentum around ESG over the past year, noted Li. “There were discussions and forums around ESG but nobody really cared or had any idea about how to do ESG before.”

More investment products and indices have emerged that allow investors to invest in ESG more easily, she added.

This is partly down to the country’s macro strategy on environmental protection. 

China must prioritise conservation of resources and environmental protection as fundamental national policy and must develop green finance and build green industries, Chinese President Xi Jinping said in the working report delivered at the start of the Party Congress in October last year.

REGULATION SEEN AS KEY 

However, ESG commitment from asset owners in China and Asia as a whole is still limited.

Investors in the region are largely only following ESG principles because they have to, rather than because they necessarily want to – so governments need to take the lead, said speakers at AsianInvestor’s ESG Investment in Asia forum in March. 

Certainly some have been making moves on this front. In recent years some Asian countries have implemented stewardship codes that promote accountability and corporate governance in investments, such as the Malaysian Code for Institutional Investors in 2014, the Singapore Stewardship Principles for Responsible Investors in Singapore in 2016, and the Korea Stewardship Code and Principles for Responsible Institutional Investors in Japan in 2017. 

The region is moving in the right direction, but there is some way to go.

The United Nations Principles for Responsible Investing (UN PRI) is seen as the leading body for promoting ESG. All told, 373 asset owners have signed up to its six principles. But just 21 of these are based in Asia (excluding Australia), and 16 of them reside in Japan. There are none in China, Hong Kong or Singapore, and just one in Korea. 

According to the 2016 Global Sustainable Investment Review, only $52.1 billion of funds in Asia excluding Japan were managed with “responsible” investment strategies. That’s a fraction of the $12 trillion in Europe, $8.7 trillion in the US and $473.6 billion in Japan.

HIGHLIGHTS OF THE GUIDELINES

Among the recommendations in the consultation paper are that asset managers starting green investments should:

  • consider favourably firms or projects related to green industries, such as environmental protection, energy saving or clean energy;
  • adopt available benchmarks for selecting green investments, such as China Securities Regulatory Commission’s guidance on green bonds;
  • set up special teams for research on green investments, to gradually establish and improve the relevant database, methodology and investment strategies;
  • include green factors in the fundamental analysis for calculating risk-adjusted returns for actively managed green investment products; and
  • consider compiling a negative list of companies that do not meet green standards.

 

For more insights on investing in China, AsianInvestor is hosting its 5th China Global Investment Forum in Beijing on September 13. For more details, visit the website or contact us on +852 2122 5262