Chinese asset owners are showing signs of taking a more systematic approach to ESG with China's sovereign wealth fund and an industry regulator recently releasing methodologies that are paving the way towards sustainable finance.
In early June, China’s top regulator for the banking and insurance industry, the China Banking and Insurance Regulatory Commission (CBIRC), released its green finance guidelines for the banking and insurance industry, with effect from June 1.
It provides detailed guidance and outlines basic requirements for responsible investment, stewardship, corporate governance, and risk management.
Not long before the CBIRC announcement, China Investment Corporation (CIC) published its own guidelines on achieving net zero by 2060 in line with government commitments.
“The recent release of the guidelines is another testament to CIC’s determination to advance sustainable development and contribute to attaining carbon peak and carbon neutrality goals,” CIC said in a press release.
CIC is the world’s largest sovereign wealth fund with about US$1.2 trillion of assets under management, according to data platform Global SWF.
In 2020, China pledged to achieve carbon neutrality by 2060 and aims to have carbon emissions peak before 2030.
To help attain such goals, CIC said it would incorporate climate change factors into strategic asset allocation, formulate differentiated sustainable investment assessment based on asset class, impose higher standards on carbon footprints on existing and new deals, and actively invest in new climate change opportunities.
It also specifies targets for research, risk management, and operations.
“I think CIC’s guidelines for both its operations and investments, serve as pioneering (works) for Chinese asset owners,” said Julie Zhu, Beijing branch manager at Northern Trust. “It reflects a more systematic approach of Chinese asset owners in incorporating environmental, social, and corporate governance.”
ESG, usually called green finance in China, is not a new concept for asset owners, Zhu noted. However, it takes time for investors to move from the previous case-by-case approach, to a more systematic incorporation into operations and investment processes, she said.
Currently, four Chinese asset owners, among a total of 691 global asset owners, are signatories of the Principles for Responsible Investment (PRI). They are China Pacific Insurance, Ping An Insurance, Taikang Insurance, and family office Wu Capital.
Additionally, PRI now has 74 Chinese asset managers and 23 service providers as members, in a pool of 3,796 and 509 peers. Though more Chinese investors are participating in international initiatives, the portion is still small.
In its guidelines, CIC pledged to strengthen communication with international organisations and proactively engage in global governance on green finance, while seeking to form green partnerships with global sovereign wealth funds and asset managers.
Despite CIC's leading role, ESG development on a large scale still requires direction from regulators.
In CBIRC’s green finance guidelines, it said the board of directors of these financial institutions should be responsible for determining ESG development strategies, and that they should establish institutional arrangements to facilitate relevant development.
It also asks them to strengthen ESG considerations and monitoring throughout their whole investment process, enhancing information disclosure, stewardship, and risk management.
“The CBIRC guideline is momentous in guiding the financial industry in incorporating ESG,” said Zhu, stressing that for asset owners of different types, such as pension funds and insurers, their respective industry associations and regulators play a vital role in driving ESG developments.
While CBIRC encourages the banking and insurance industry to fund the energy transition of large emitters, the regulator stressed that the decarbonisation of portfolios should not be implemented too aggressively to ensure energy safety and normal supply chain operations, since China is still heavily reliant on fossil fuel.
In the winter of 2021, northeast China endured large scale power cuts in both households and factories as a result of the government’s tough environmental curbs to achieve carbon neutral. It was also caused by headwinds from coal supply problems and a defective coal pricing system.
Currently, the Chinese government and the European Union are working together to come up with a common ground taxonomy.
Earlier in January, the People’s Bank of China concluded a series of climate risk stress tests for 23 major banks predicated on the possibility of certain high emission industries defaulting. The central bank aims to test even more industries and facilitate the application of relevant data in the financial industry.
“You see some interesting developments in China… My impression of asset owners in China is that they focus a lot on investing in energy transition solutions to help China transition,” said Liza Jansen, head of responsible investment at Prudential, in an earlier interview.
“They communicate a lot about how much they invest in specific solutions. They're very strong on finding these investment opportunities, and reporting about them as well,” Jansen said.
Despite these development, China still lacks established ESG standards on regulatory issues such as rating, scoring, and disclosure.
Northern Trust’s Zhu said there was an increasing focus on the "how" as organisations asked for clearer guidelines from the regulators on unified standards, on what to disclose in the balance sheet, and how to disclose, for example.
“But for sure, China’s rising focus on ESG and its efforts to raise awareness among the financial industry is beneficial to attracting foreign investors,” Zhu said, noting that ESG is an important factor in foreign investors' selection of assets and local asset managers in China.