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Charting China’s ESG integration journey

Aside from a better than expected recovery from the coronavirus pandemic, China has emerged as a pioneer for the environmental, social, and governance (ESG) market in Asia. The country is more determined than ever to make progress in the area of sustainable investment, providing one of the niche markets for investors to participate in Asia’s ESG push.

Within Emerging Asia, the world’s second-largest economy is ahead in gradually building up ESG capabilities. China in its 14th Five-Year Plan period will continue to enhance ESG efforts, therefore, providing major support for the growth of sustainable investments.

China’s growing ESG ambitions

There has been exponential growth in ESG adoption and awareness in China. In recent years, China’s ESG incorporation methodologies have ramped up its progress towards green finance and responsible investing. According to Ping An Research, before 2018, the market focus was on the ESG concept introduction in China. Whereas after 2018, the objective was concentrated towards ESG ratings, investment products, and investment performance.

ESG awareness among Chinese regulators and listed companies was significantly enhanced after the inclusion of China A-shares in the MSCI Emerging Markets Index in 2018. This was following the push by Chinese policymakers and regulators to move the system towards a ‘green financial system’ starting in 2016.

As per MSCI Research, Chinese companies’ ESG performance improved since 2018. It added that Chinese companies with better ESG performance were more inclined to exhibit lower systematic risk than low ESG-rated Chinese companies.

Later, China Securities Regulatory Commissions (CSRC) and the Shanghai Stock Exchange promoted new ESG guidelines in 2019. Recently in May 2021, Chinese regulators had set a goal for listed companies to make mandatory ESG disclosures in their annual and semi-annual reports. Both Shanghai and Shenzhen Stock Exchanges have encouraged ESG information disclosures since 2006.

Michelle Qi, Head of Equities, Eastspring Investments, believes that policy support and regulatory changes will help improve the ESG information disclosure in China and foster an environment for greater ESG equity investing over time.

In addition to this, the world’s largest carbon emitter has committed to turning carbon neutral by 2060, at the 2020 General Debate of the 75th Session of The United Nations General Assembly.

China as the world’s largest user of fossil fuels and the biggest automotive market is also transitioning to renewable energy and electric vehicles. The country already ranks as the world leader in the areas of electric vehicles and renewable energy pick-up.

ESG investing gains ground

With the recent changes, there has also been a drastic rise in investors’ interest in sustainable investment and finance. According to a recent study, Chinese investors are thinking ahead among their global peers when it comes to ESG investing.

A 2021 survey across investors in the U.S., Europe, and Greater China by Brown Brothers Harriman revealed that 92% of investors in Greater China plan to allocate more capital to ESG strategies this year, while in the U.S. 80% and in Europe only 66% said so.

In total, 82% of the 382 surveyed investors planned to increase their allocation to ESG investments in 2021. As per the survey, Europe appears to be softening ESG allocations, while investors out of the US and Greater China may increase ESG exposure over the next five years.

The Chinese market seems to reflect the interest. A series of ESG indices and investment strategies were launched during China’s 13th Five-Year Plan period (2016-2020). A report by Syntao Green Finance, suggested that the number of pan-ESG indices has increased by 34% and the number of pan-ESG mutual funds by 79%. The number of pan-ESG stock indices has also steadily grown to 52 that track A shares, as of October 2020.

Capturing the China ESG momentum

ESG is clearly a growing investment theme that has gained momentum since the pandemic and China’s progress and ambition on ESG makes it an attractive investment destination. Furthermore, the opening of China’s capital market has also led to attracting more international capital. Consequently, not only in the country but also abroad asset managers are launching strategies to caputure the investment opportunities.

However, pure China-ESG strategies are still rare in Europe. In the ETF sphere, there are already a few, including:

  • L&G ESG China CNY Bond UCITS ETF (ISIN: IE00BLRPQL76), inception: December 3, 2020
  • KraneShares MSCI China ESG Leaders UCITS ETF (ISIN: ISIN IE00BKPT4N29), inception: February 3, 2020
  • UBS ETF (LU) MSCI China ESG Universal UCITS ETF (ISIN: LU1953188833), inception: July 26, 2019

On the mutual funds side, investors can best take advantage of opportunities to benefit from China’s ESG momentum through Asia ESG-themed funds with a higher allocation in China, like the Fidelity Funds – Sustainable Asia Equity Fund or the Aberdeen Standard SICAV I – Asian Sustainable Development Equity Fund.