The Chinese government is likely to require that its local asset owners introduce environmental social and governance (ESG) concepts in their investing processes in its coming five-year plan for the nation, in a move that could foster huge advances in the ESG investment market over the coming few years.  

That is the prediction of investment consultancy and accounting and consultancy firm KPMG.

"In mainland China, we are foreseeing that the 14th five-year plan that is coming out later this year will have a significant element on sustainability and China transitioning to a lower carbon economy. And it will impact the sustainable finance market ... from what we are seeing [it's] more than likely that it's going to happen,” Pat Woo, partner and business reporting and sustainability at KPMG China, told AsianInvestor.

Pat Woo, KPMG

China’s five-year plans consist of a series of top social and economic development initiatives for the next half-decade, which are set by its top Communist Party leadership. The next plan is set to be announced at the National People’s Congress (NPC). The political gathering is usually is held every March in Beijing, but it and the Chinese People's Political Consultative Conference will both likely be delayed because of the Wuhan coronavirus outbreak.

The potential for Beijing to actively demand its institutional investors consider ESG would help them become major participants in the ongoing discussion about how best to combat climate change. Their voices and influence could prove particularly important, given that China is, by some distance, the largest carbon emitter in the world.  

The country has many sizeable investors. The latest AI300, AsianInvestor' proprietary database of the top 300 asset owners in Asia, included 40 Chinese institutional investors with a combined $6.57 trillion of assets as of 2019.

Their voices and influence of China's investors could prove particularly important, given that the country is the largest carbon emitter in the world

It's unknown how Beijing would look to promote ESG concepts among its investors. However, Woo believes the country could emulate the manner in which other countries have done so.

Regulators across the world have begun making higher ESG demands of institutional investors, starting with the sovereign wealth funds and the pension funds. In Asia Japan has been among the biggest advocates; the country introduced a stewardship code in 2014, which aims to get investors to take their fiduciary and governance responsibilities seriously. In addition the Government Pension Investment Fund, the world’s largest pension fund with ¥168.99 trillion ($1.54 trillion) in assets, is strongly engaged in ESG.

Until recently Hong Kong was a bit of a laggard in ESG, but it is also raising its commitments. It also has a stewardship code, while the Hong Kong Monetary Authority also said for the first time in May last year it will consider ESG when investing. The de-facto central bank is now spearheading efforts to promote ESG and green finance, both in its investment activities under its Exchange Fund and via its ability to influence banks as a regulator.

It is possible that Beijing could seek to have its big state pension fund, the National Social Security Fund, play a similarly influential role. Governance and ESG advocates have long urged the asset owner to take the wheel in China’s ESG drive. In 2018 Jamie Allen, secretary general of Asian Corporate Governance Association (ACGA), told AsianInvestor the asset owner should adopt a stewardship code as part of ESG promotion efforts.  

Currently Ping An is seen to be the leading Chinese institutional investor for ESG development. The financial group, which owns China’s second-largest life insurer, is the first China asset owner to have signed Climate Action 100+ and the United Nations’ Principle of Responsible Investment (UN PRI), in December and September last year, respectively.

Climate Action 100+ is an investor initiative to help reduce greenhouse gas emissions, while UN PRI signatories are to incorporate ESG factors into their investment and ownership decisions.

Ping An also aims to complete its intelligent investment platform for ESG this year and hopes the technology can be widely adopted by the industry when it becomes robust.

HEDGE FUND PIVOT

The rising seriousness with which asset owners are taking ESG is also forcing asset managers to change their behaviour. A KPMG study released last week noted that this has even spread to hedge funds, a form of alternative asset class that hasn’t traditionally been the centre of the conversation about ESG.

According to the survey, 45% of institutional investors now invest in ESG hedge funds due to the view that such a focus offers opportunities to both generate alpha and create a more defensive portfolio against the blind spots in markets that are slow to price in ESG risks.

Hedge fund managers spotted this preference, and are increasingly seeking to better integrate ESG principles into their investing. In total, 15% of the surveyed hedge fund managers define themselves as being at the 'mature' stage, where ESG is implemented across the firm via appropriate policies, committees, research and data. A further 44% said they are at the 'in progress' stage, while 31% are still at 'awareness raising' stage; leaving the remaining 10% having conducted 'no implementation to date'.

“As an investment firm, if you are not taking this (ESG) on board, then it will be very hard to raise funds going forward. And as a corporate, if you are not taking this on board, and you are not aware of the environmental and social risks around you, the ease of access to capital or the cost of capital is going to be an issue in the next decade,” Woo said.

The survey, conducted between November 2019 and January 2020, was based on responses from 135 institutional investors, hedge funds and long-only managers with total assets of $6.25 trillion in 13 countries or territories. It was jointly published by KPMG, the Alternative Investment Management Association (Aima), Chartered Alternative Investment Analyst Association and Create-Research.