There is an
increasing awakening within China’s asset management community when it comes to
Environmental, Social and Governance (ESG) investing: one day, it could be even more important than value investing
strategies.
Robert Li,
investment strategist with China Asset Management Co, belongs to this camp of
investors.
“When Buffett first
promoted the idea 40 years ago, few recognised its significance, but today it
is a widely followed philosophy. Likewise, ESG investing is going to be
eventually accepted by all investors,” Mr Li said.
Although China has
yet to fully embrace the concept of fiduciary duty in its legal system, more
Chinese investors like Mr Li are realising the profound implications of their
duties. A complex interaction of regulation, soft law and market innovation has
made fiduciary duty an increasingly important factor in investment.
Against this
backdrop, the United Nations Principles for Responsible Investment has issued
its latest report titled “Investor Duties and ESG Integration in China”,
supported by BNP Paribas. The report details recommendations for investors. The
central message of the report is that investors should integrate environment
ESG issues into their investment decision-making processes as part of
fulfilling their duties towards their beneficiaries and to support the
development of China’s Ecological Civilisation. Investor duties should reflect
and align with the Chinese government’s Guidelines for Establishing a Green
Financial System (GEGFS).
Domestic and
international capital markets are expected to play a significant role in
financing China’s green transformation and growth. Sitting at the top of the
investment chain, asset owners are critically important to this process.
Through their investment practices and through the signals they send to the
wider investment market, they have the ability to cascade and drive green and
sustainable capital through the investment chain.
Ma Jun, Chairman of
the Green Finance Committee of China Society for Finance and Banking, an
organization under China’s Central Bank, said at the report launch that
although China is making progress on greening its financial sector, more work
needs to be done to raise the awareness of investors’ duties.
“China has already been taking the lead on
quite a few fronts in terms of greening its financial sector. For instance, the
Guidelines for Establishing the Green Financial System have won global recognition;
the growth rate and prospected scale of the country’s green bond market has
been very impressive, so has the growth of green funds,” said Mr Ma. “However,
we have to admit that we’re still behind developed countries in terms of
fiduciary duty.”
Mr Ma said asset owners’ awareness of their
responsibilities to green their investments is still relatively low, and that
will require both better investor education from industry associations and more
clear directives and guidance from supervisory bodies.
Meanwhile, although China already has a quite
aggressive timetable and road map for all publicly listed companies to disclose
their environmental information by 2020, more detailed research, as well as
pilot work and capacity building are still needed to make sure corporate
disclosure is adequate, reliable and meaningful to the green transformation,
according to Ma.
He also said that compared to their Western
counterparts, Chinese investors still do not have tools and methodologies for
data collecting and index designing to effectively measure a company’s green
performances. In addition, there is a limited variety of green assets available
within China’s capital markets and green bonds remain in their infancy.
Hong Kong is developing its own special role
in this regard, to act as a gateway for international investors to access
Chinese green bonds, widening the investor pool and deepening channels for
mainland issuers.
Paul Yang, Head of
Greater China for BNP Paribas, said international banks must play a role facilitating
the flow of capital into China.
We see it as our responsibility, as an international bank, to help direct financial capital to projects that support sustainable economic development and eventually contribute to a better future. Our approach is to enable sustainable development by fostering the right financing and investment decisions. Our clients expect their banks to be able to advise and lead them in this regard
Paul Yang, Head of Greater China, BNP Paribas
The report, jointly released by United Nations
Environment Finance Initiative (UNEP FI), the Principles for Responsible
Investment (PRI), The Generation Foundation, and the International Institute of
Green Finance (IIGF), also identified barriers to integrate ESG factors in
investment decision-making:
- The lack of formal regulatory mechanisms that require investors, and in particular asset owners, to take account of ESG factors in their investment processes;
- The lack of guidance to support investors in integrating ESG factors into their investment processes;
- Difficulties in engaging companies on ESG issues due to the lack of consistent, comparable and reliable reporting by companies;
- The lack of unified definitions aligned with international practice for green and sustainable investment products;
- The lack of knowledge of the investment case for integrating ESG factors to drive value creation, and how company performance on ESG factors might be used in investment research and decision-making processes; and the perception that ESG factors and green finance are ethical issues that compromise returns, and are separate to fundamental investment analysis.
To close these gaps, the report also made detailed recommendations, including:
- Publishing guidance on green and sustainable investment that articulates how institutional investors and their investment managers should implement the Guidelines for Establishing the Green Financial System;
- Introducing regulation for pension funds to integrate ESG issues, encourage high standards in investee companies and disclose on ESG practices and performance;
- Ensuring and monitoring the effectiveness of the mandatory environmental disclosure framework for companies, and aligning with international disclosure standards for ESG issues;
- Expanding a standardised offering of green and sustainable investment products and comprehensive tools to support their market uptake. The demand from financial institutions for green investment is growing and can be further strengthened; and
- Supporting investor education and ESG investment research, and building operational capacity for sustainable investment.
Kong Wei, a lawyer from Zhong Zhun Law Firm, said despite lacking direct definition of fiduciary duties in China’s legal system, there are more than 200 pieces of law and regulations that lay out legal frameworks for ESG investing. Particularly, the concept of Ecological Civilisation that was enshrined in the constitution has provided a solid foundation for factoring in ESG issues in investment practices.
Wang Yao, director general of the International Institute of Green Finance (IIGF), said China’s asset managers are starting to see how integrating ESG factors into their investment decisions also makes financial senses.
Ms Wang said empirical studies by her organisation into the top 300 stocks traded on the Shanghai and Shenzhen stock exchanges have proved a positive correlation in return on investment (ROI) and the companies’ ESG performance, that is, the better a company’s ESG performance, the higher its ROI. And the correlation is more visible in manufacturing than in financing and service industries.
“All investors care about returns, so to encourage more such integration, it is necessary to make investors realise that environmental risks do exist and will bring risks to their portfolio; while on the other hand, ESG investing does bring better investment returns,” Ms Wang said.