Environmental, social and governance (ESG) strategies have gained traction in the global financial marketplace and China is trying to catch up, encouraged in part by the government's own green priorities.
In its 2019 budget, the central government expects to allocate Rmb60 billion ($8.94 billion) to prevent and control pollution. Accounting for 35.9% of the budget, it's the biggest item on the agenda.
Industry practitioners have been preparing their ESG strategies. In July 2018, the Asset Management Association of China (AMAC) proposed guidelines for asset owners in China to better evaluate the adoption of ESG principles by external managers.
Investment experts are also responding to the trend. As of today, there are 22 Chinese entities have signed up to the UN's Principles for Responsible Investment, accounting for close to 10% of the total number of signatories.
ESG strategies will be likely to be integrated with investments in China as the economy continues to open up and more Chinese companies become subject to global governance standards.
In that regard, MSCI's upwardly revised plans to include A shares in its emerging markets benchmark could be a catalyst.
But the question remains, to what degree will Chinese companies be able to keep pace with companies elsewhere in the world when incorporating ESG standards?
AsianInvestor asked five specialists for their views.
The following extracts have been edited for brevity and clarity.
Tan Jenn-Hui, head of capital markets and corporate governance
The disclosure on ESG-related matters among Chinese companies is currently very limited. Without a standard framework, it is challenging to properly assess potential ESG risks. However, we are seeing positive actions from regulators. The China Securities Regulatory Commission (CSRC) is in the process of developing its “ESG Disclosure Guidelines for Listing Companies”… [and] such guidelines will help significantly to improve company disclosure on ESG matters and support overall ESG investing in China.
Local industry associations are also stepping up their efforts to educate domestic institutional investors. Specifically, the Asset Management Association of China recently published its guidelines on green investing and provided training for its members on ESG integration.
Through joint efforts between regulators and investor communities, we are positive on the outlook of ESG-related investments in China.
We are supportive of the recently amended Corporate Governance Code by the CSRC, which included a dedicated chapter clarifying the roles and expectations of institutional investors and other stakeholders. In the future, there may be value in separating this chapter from the CG Code and establishing a standalone Stewardship Code to encourage greater investor participation and improve disclosure on ESG integration.
We believe that financial institutions should be subject to higher ESG standards. We would like to see a separate ESG disclosure guidelines issued by the China Banking and Insurance Regulatory Commission for financial institutions to encourage the disclosure of their detailed assessment on ESG risk exposures within their loan books or asset pools.
Nana Li, senior research analyst
Asian Corporate Governance Association
The drive from the Chinese government to promote green finance has been going on since 2016 and has not lost momentum so far. Some quasi-official guidelines have already been seen [and ... the stock exchanges will come up with ESG disclosure guidelines soon to help investors gather more ESG-related information for listed companies in China.
We have also seen more investor-education efforts being made by the CSRC to educate investors about ESG considerations and the importance of having a long investment horizon. Although still far from adequate, it [is an improvement on] the previous status.
In a market that is as top-down ... as China, it is not difficult for the authorities to ask financial institutions in the market to take ESG factors into their investment decision-making. However, the danger here is that the authorities have to first understand this concept and its implications correctly.
You cannot get a right answer if you set the formula wrong in the first place and we do not need another case of “form over substance” in complying with rules in China or Asia. ESG is a broad concept and it takes time for a market to fully embrace the change even under the right leadership.
Alaa Bushehri, head of emerging markets corporate debt
BNP Paribas Asset Management
China has been a key proponent of green investment globally. According to environmental consultancy ENEA, China is set to invest $2.2 trillion across six sustainability focused sectors by 2020, an amount close to India's GDP in 2017. This has translated into the financial sector, with the push for Chinese entities to issue green bonds propelling China into the top-3 in terms of the largest global green bond issuers in each of the last three years.
We also increasingly [see] some cooperative initiatives taking place, such as the memorandum of understanding signed in January between the Shanghai Stock Exchange and the Shanghai Environment and Energy Exchange, aiming at intensifying domestic and overseas cooperation in green finance and jointly promoting the research and development of green indices and products.
From a market size perspective, the commitment to ESG-related investments also starts to show in the numbers, with Chinese green and ESG funds now totaling over Rmb200 billion in assets under management.
ESG still remains nascent today and there is still a need for both greater education and guidance on implementation, to enhance awareness and enable sound market development and not just have market participants “comply” with ESG-related ... regulation.
From the financial institutions side … industry bodies like the AMAC organise seminars on ESG investing in order to raise awareness among their members. We believe this need for education is not specific to China, as awareness among market participants remains low in many other parts of Asia.
Mary Leung, head of advocacy for Asia Pacific
The main obstacles for institutional investors to develop ESG investment are the lack of standardised ESG-information disclosure rules, [the lack] of complete or credible ESG information from listed companies and the lack of objective and fair third-party ESG evaluation.
The CSRC, in collaboration with China’s Ministry of Environmental Protection, has introduced new requirements, and by 2020 will mandate that all listed companies and bond issuers disclose the ESG risks associated with their operations.
[It is strongly anticipated] that ESG reporting guidelines for the A-share market will be released in 2019. As a result, it is possible that listed companies will upgrade their corporate social responsibility (CSR) reports into ESG reports with significant improvements in material and quantitative content.
This is already seen as having a knock-on effect in other markets, notably Hong Kong, where the Securities and Futures Commission and stock exchange operator are working towards further enhancing local ESG standards
[In terms of mutual funds], in November 2018 the AMAC released its Guidelines for Green Investment (Trial Version) … [In it] AMAC suggests that fund managers should provide financial services to support environmental improvements that address climate change, resource conservation and efficient resource use. AMAC also further encourages fund managers to voluntarily comply with published green criteria when screening investment opportunities … Together with the increasing number of PRI signatories, [this] should hopefully lead to more ESG-themed mutual fund products and ESG themed indices in China.
Sisi Liu, ESG specialist
Harvest Global Investments
The momentum [behind ESG investing] is actually quite strong since last year; there are many more market participants and they are joining into discussions and doing more ESG education in the Chinese market. It is a very positive sign [and] will help investors to understand how ESG could be integrated in China.
Data has traditionally been a bottleneck but as the market and demand grows, both regulators and asset managers will request better data availability, which will encourage further ESG research in China. The increase in data and the various uses demonstrated by asset managers could ... facilitate potential ESG investments in China in the future.
Another part of the facilitation would come from MSCI's A share inclusion ... as more Chinese companies realise that they are now rated on their ESG performance. They will potentially [become more open about discussing] the ESG issues in their business.
Chinese [asset] managers like us are trying to communicate our ESG views and ESG demand with these companies so they can be more open and think about their data disclosure and their long-term ESG strategies. Eventually it's the companies who will disclose the data and also take ESG into their business strategies.
[Leadership from large asset owners] can certainly push [other] asset managers, and eventually the companies [they invest in], to have a better ESG understanding and ESG integration in [the way they invest].