preface
It's the strategy: what ESG investing means for sustainability
Autumn winds are blowing, but the recent hot summer has made people realize once again the importance of slowing the deterioration of climatic conditions. Calling for action to pay attention to climate change, we are not only protecting the earth, we are also protecting our own living environment, so that the survival of human beings can be continued - we have to save ourselves when there is still time and space.
With the continuous extreme heat in many parts of the world, coupled with the immediate events that have occurred just around the moment, the major impact of the COVID-19 epidemic on human life safety, economic and social life in the past three years, sustainable development has become an important issue recognized by society. Yes, this is one of the few topics on which people have reached such a consensus during this time.
In such an environment, in the field of investment, ESG investment is beginning to receive more attention. ESG investment ideas originate from abroad and are developing rapidly in the global market. The scale of ESG investment in China is also expanding under the impetus of various policies, and has gradually become an important force in the strategic deployment of "double carbon". More and more companies are managing ESG standards, and China's regulatory authorities have issued a series of policies to promote the disclosure of ESG-related information.
In fact, corporate ESG management is a behavioral tool to achieve sustainable social development, and human goals are to be ahead of this tool. If one day, we can all let go of this tool, it will be the time for human beings to truly awaken.
At present, ESG investment presents new characteristics in the world: First, investment institutions tend to combine multiple ESG investment strategies for investment decisions, and ESG integration strategies replace negative screening as the most popular sustainable investment strategy; Second, investors incorporate ESG factors into Smart Beta investment strategies in order to create additional returns and avoid downside risks; Third, climate risk factors have become the most concerned ESG factors in investment decisions.
The foreign ESG investment market is relatively mature, while China is still in its infancy. In China's booming ESG investment market, there are companies in action; There are also investment institutions that promote enterprises in action.
In this report, foreign aspects, we mainly introduced the ESG investment in the United States, Europe, Japan and other places; Domestically, we focused on the development of green credit, green bonds, ESG public funds and ESG indices that fall into this category.
In addition, we cited different examples of environmental, social and governance aspects to observe the impact of ESG factors on the investment market. In the past, at present or in the future, how the ESG management of the enterprise is, it is the reputation of a company, and it is also an evaluation system that people cannot avoid. It can polish a brand's color, or it can make a brand dull. For investors, a good ESG management company will undoubtedly get more capital – people will think it is worth investing in, or think that it is relatively safe for investment funds.
Over the past decade, China has introduced a series of policies related to sustainable development to promote ESG investment. We believe that the development of ESG investment in China in the future will show the following trends: First, the signing of the Paris Agreement has made investors pay more attention to sustainable development projects; Second, the "double carbon" strategy makes carbon emissions included in investment considerations; Third, the impact of the new crown epidemic has made people have a new understanding, and it has promoted sustainable development concepts such as ESG to become an important consensus; Fourth, sustainable development related policies will continue to be an important driving force for the ESG investment market.
With consensus, action is needed, step by step to become the road under your feet. ESG investment still has a long way to go in the Chinese market: first, the ESG investment concept has not yet been deeply popularized in China, and enterprises lack the initiative of information disclosure; Secondly, the relevant policies lack unified standards, and the ESG information disclosure system of enterprises is not perfect; Third, the ESG evaluation system is different, resulting in different evaluation results.
In view of the weaknesses of ESG investment in the development of the Chinese market, this report puts forward countermeasures and suggestions: First, promote the concept of ESG investment and further increase the number and scale of high-quality ESG products; The second is to standardize the ESG information disclosure system and improve the quality of information disclosure; The third is to promote the standardization and standardization of ESG evaluation and increase policy drive.
When one day, instead of talking about ESG metrics, we treat sustainable management and investment ideas as conscious behaviors, our world will be much better. And now is the time when each and every one of us needs to work hard.
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The idea of ESG investing and its origins
01. The concept of ESG investment
ESG investment refers to an investment philosophy that takes environmental, social and governance factors into account in the investment decision-making process. Investors can evaluate the sustainability of business operations based on the above three factors and make investment decisions accordingly. Specifically, ESG investment incorporates non-financial factors such as environmental, social and governance issues that may affect the sustainable operation of a company into financial analysis and is included in the scope of investment and research. In general, the coverage of ESG factors is shown in Table 1.
In recent years, as China continues to promote sustainable and high-quality development, the capital market is gradually understanding and accepting the concept of ESG investment. Words such as ESG investment also appear frequently in the public eye, including responsible investment, ethical investment, socially responsible investment, sustainable investment, etc. Although the words and sentences are different, the meanings are generally the same.
Table 1 The main coverage of ESG factors
Source: CSI
02. The origins of ESG investing
As early as the 16th century, values-driven forms of ethical investment emerged, and this idea was later promoted by later generations, such as the Goddess of Peace World Fund against the manufacture of nuclear weapons and investment in the military, which was born in the mid-to-late last century. In the 1960s, ethical investment evolved into an early socially responsible investment while reaping benefits by combining concepts such as social responsibility, ethical behavior, and environmental protection. By the 1990s, the concept of socially responsible investment had evolved into sustainable responsible investment, and the ESG investment framework was gradually taking shape.
The concept of ESG investing was presented in the 2004 UN Global Compact report Who Cares Wins – Connecting Financial Markets to a Changing World. The report invites a series of recommendations from different financial sector participants to jointly find solutions to integrate ESG value drivers into financial market research, analysis and investment. For the first time, the 2005 Who Cares Wins conference brought together institutional investors, asset managers, buy-side and sell-side research analysts, global advisors and governments and regulators to explore the role of ESG value drivers in asset management and financial research. Participants generally agreed that ESG factors play an important role in long-term investments. In 2006, Kofi Annan, the seventh Secretary-General of the United Nations, invited investors from a group of the world's leading financial institutions to jointly develop Principles for Responsible Investment (PRI) and founded the United Nations Organization for Responsible Investment Principles (UNPRI). The Principles were published on the New York Stock Exchange in April of the same year (Table 2) and provide a feasible guide for incorporating ESG issues into investment practices. Since then, ESG investments have grown rapidly around the world, supported by a push from UNPRI.
Table 2 Specific content of the six UNPRI principles
Source: UNPRI
ESG investment strategy classification
In the Global Sustainable Investment Review 2012 published by the Global Sustainable Investment Alliance (GSIA), ESG sustainable investment strategies were classified and defined for the first time, and have become the global classification standard. The European Forum on Sustainable Development (Eurosif) has a similar classification. To reflect the latest ideas and practices in the global sustainable investment industry, in October 2020, the GSIA also revised the definition, and the current mainstream seven types of investment strategies are as follows:
01. ESG Integration
An ESG integration strategy is when an investment manager systematically and explicitly integrates environmental, social and corporate governance factors into a financial analysis. This type covers the explicit consideration of ESG versus financial factors in mainstream analysis of investments. The integration process focuses on analyzing the potential impact of ESG issues on the company's finances, both positive and negative, so as to incorporate the impact into investment decisions.
02. Corporate Participation and Shareholder Actions
Corporate participation and shareholder action strategies refer to the use of shareholder rights to influence corporate conduct, submit or jointly submit shareholder proposals, and conduct proxy voting under ESG guidelines. This strategy emphasizes that the company is actively engaged and shareholders are actively involved in the ESG aspect of the business, and participation in corporate governance alone is not enough to be included in this strategy. Shareholders are required to use their influence in the organization to actively vote and support the company's behavior and activities in accordance with the ESG Code. Corporate participation and shareholder action is a long-term process that increases the disclosure of ESG-related information and enhances the influence of ESG on the enterprise.
03. Specification Screening
Regulatory screening refers to the screening of investments according to minimum commercial or issuer criteria based on international norms. International standards and norms on ESG factors generally refer to those defined by international bodies such as the United Nations (UN), the International Labour Organization (ILO), the Organization for Economic Cooperation (OECD) and non-governmental organizations (such as the International Organization for Transparency International).
04. Negative screening
Negative screening is when a fund or portfolio eliminates certain sectors, companies or businesses in accordance with specific ESG criteria. This approach is also known as an ethical or values-based exclusion method, as the exclusion criteria often rely on the choice of the fund manager or asset owner. Common exclusion criteria include specific product categories (e.g., weapons, tobacco), corporate practices (e.g., corruption, human rights violations, animal testing), and other contentious behaviors.
05. Positive screening
Positive screening is when an ESG invests in an industry, company or project that performs better than its peers and whose rating is above a specified threshold. Select or weighted the best ESG performance projects, companies or industries in a category or rating according to ESG guidelines. Or rather, within a defined range of investments, select or weight the projects, companies, or industries that perform best or improve the most as determined by ESG analysis. This approach includes "best in class", "best overall", and "best effort".
06. Investments in sustainable development themes
Sustainable development thematic investment refers to investing in themes or assets that contribute to sustainable solutions, and is essentially committed to solving environmental and social problems such as climate change mitigation, green energy, green buildings, sustainable agriculture, gender equality, biodiversity, etc. Thematic funds need to undergo ESG analysis or screening before they can be included in this approach.
07. Impact Investing (Community Investing)
Impact investing refers to investing in specific projects that address social or environmental issues with the goal of generating positive social and environmental impacts while reaping financial returns. Impact investing includes microfinance, community investment, social business/venture capital funds, etc. Community investment refers to capital invested exclusively in individuals or communities traditionally underserved, as well as in providing financing to businesses with clear social or environmental goals. The basic principle is to take measures to improve existing physical conditions, educational resources or employment opportunities, etc., to bring value and benefits to interested parties.
New features of ESG investments
01.
Negative screening is no longer the most popular, and investment institutions tend to combine multiple ESG investment strategies
According to GSIA's Global Sustainable Investment Review 2020 report, the world's largest sustainable investment strategy in 2020 is the ESG integration strategy (Figure 1), with total assets reaching $25.2 trillion. This is followed by a negative screening strategy with a scale of $15.9 trillion. It can be found that compared to 2018, the negative screening as the most popular sustainable investment strategy has changed, and ESG integration has jumped to the first place instead of negative screening. From 2016 to 2020, ESG integration strategies rose by 143%, with a compound annual growth rate of 25%. In addition, more and more investment institutions are using a combination of multiple ESG investment strategies to make investment decisions, rather than relying solely on one strategy (Table 3). For example, Europe's Sustainable Financial Disclosure Regulations require investment managers to include sustainability risks in their investments, resulting in negative screening, regulatory screening and ESG integration into investment strategies for financial products in the region. The combination of multiple ESG investment strategies is also becoming a means for the global sustainable investment industry to integrate sustainability risks and opportunities.
Figure 1 Scale of global sustainable investment strategies in 2016, 2018 and 2020 (US$1 trillion)
Source: GSIA, CBN Research Institute
Table 3 Share of sustainable investment strategies by region of the world in 2020
Source: GSIA, CBN Research Institute
02.
ESG factors and their ratings are combined with Smart Beta strategies to create additional gains and avoid downside risks
Incorporating ESG factors into Smart Beta portfolios has become a new feature of ESG investing. In the portfolio construction process, ESG factors and their corresponding scores can be used as weighted indicators to create additional risk-adjusted returns, reduce downside risk, and strengthen the ESG risk response ability of the portfolio. FTSE Russell's survey shows that more and more global asset owners intend to apply ESG factors to their Smart Beta strategies. Among respondents who are using Smart Beta strategies today, the proportion of respondents who say they will combine ESG factors will reach 58% in 2020, 14 percentage points more than in 2019. This is even more pronounced in North America, where it grew from 17% in 2019 to 42% in 2020. In addition, nearly half of respondents considered upgrading the configuration of the integrated ESG factor in Smart Beta over the next one to two years. The combination of ESG and Smart Beta can achieve economic, environmental and social benefits and may become a popular trend.
03. Climate risk factors have become the most concerned ESG factors in investment decisions
As the problem of global warming becomes more and more serious, climate risks have attracted widespread attention around the world. More and more investors are inclined to use climate scenarios to assess the climate risks of their portfolios, including physical risks (such as losses caused by storms, forest fires, etc.) and transformation risks (such as falling oil demand and rising demand for new energy sources). According to Statista's statistics (Figure 3), the most important ESG factor to be considered by global investors in 2021 is the climate risk factor, with 79% of respondents saying this factor is the most important risk or opportunity factor. It is followed by corporate governance factors (55%) and diversity, equality and inclusion (DEI) factors (52%), and human rights policy implementation factors at 45%, ranking fourth.
Figure 2 The main ESG factors and proportions of global institutional investors in investment decisions in 2021
Source: Statista, CBN
The development status of foreign ESG investment
Advancing the achievement of the Sustainable Development Goals and the climate transition will require the joint efforts of global markets. Led and driven by UNPRI, the global asset size involving ESG investments exceeded $121 trillion in 2021, up more than 17% from $103.4 trillion in 2020. As of June 30, 2022, a total of 5,021 institutions have joined the PRI. Among them, there are 3811 asset managers, 694 asset owners and 516 service providers.
Figure 3 Number and proportion of UNPRI signatories in each region of the world
Source: UNPRI, CBN Research Institute
The scale of ESG sustainable investment assets continues to grow globally. According to GSIA, from 2018 to 2020, the largest scale of sustainable investment assets will be in the United States and Europe, accounting for more than 80% of global sustainable investment assets. The fastest asset growth was in Canada, with a 48% increase. It was followed by the United States, with a 42% increase. Japan ranked third, up 34 percent. Statistics show that the figure for Europe is down 13%, which the report attributes to data biases caused by significant changes in the definition of sustainable investment in the region in EU legislation.
Figure 4 Proportion of sustainable investment assets in major regions of the world in 2020
Source: GSIA, CBN Research Institute
Figure 5 The scale and growth rate of ESG sustainable investment assets in major regions of the world from 2018 to 2020
Source: GSIA, CBN Research Institute
01. Current Status of ESG Investment in the United States
The United States has become the largest country with the largest ESG investment. According to GSIA statistics, the size of sustainable investment assets in the United States in 2020 will reach $17.1 trillion, accounting for 33% of the asset management of US financial institutions and 48% of global sustainable investment assets. According to the data of the UNPRI website, there are 961 PRI signatories in the United States in 2021, an increase of 275 compared with 686 in 2020, an increase of 40.1% year-on-year. As of June 30, 2022, there were 1,003 PRI signatories in the United States. Among them, there are 854 asset managers, 65 asset owners and 84 service providers (Figure 6).
Figure 6 Percentage of UNPRI signatories in the United States
Source: UNPRI, CBN Research Institute
In the choice of ESG investment strategy, the United States excludes negative screening, holding a large proportion of global assets in terms of sustainable development theme investments, impact investing and community investments, positive screening and ESG integration. According to Report on US Sustainable and Impact Investing Trends 2020, public and insurance funds account for a relatively large proportion of institutional funds, about 54% and 36%. Among them, investment institutions are more concerned about social aspects, including the risk of war, climate change and carbon emissions.
As a result of the change of government, the regulatory policy on sustainable investment in the United States has also changed dramatically. The administration led by former President Donald Trump has sought to limit sustainable investment by taking action in the Department of Labor (DOL) and the Securities and Exchange Commission (SEC). Today, the Biden administration has taken a number of steps to reverse the situation and mitigate the upfront impact, including not restricting ESG criteria and proxy voting in retirement plans and requiring listed companies to disclose ESG information. In the meantime, the boom in sustainable investing has not been affected, and investor interest in ESG investment has continued to rise.
02. Current status of ESG investment in Europe
According to GSIA statistics, the size of sustainable asset investment in Europe in 2020 is $12 trillion, accounting for 34% of the global sustainable investment asset size, second only to the United States, but down from $14 trillion in 2018. In fact, the period is in the transition period related to the revision of the definition of sustainable investment. Regardless of calculation bias, the European region continues to lead the world in terms of sustainable investment scale.
Unlike the United States, which is passionate about the theme strategy of sustainable development, most of the strategies adopted in the European region focus on normative screening and negative screening strategies. Since the EU's Sustainable Financial Disclosure Regulation requires the inclusion of sustainable development risks in investment, in addition to negative screening and regulatory screening, ESG integration strategies have also become part of the investment process of financial products in the region. In terms of ESG asset allocation, according to Eurosif's data, equity products in Europe account for the largest proportion, as high as 46.5%, followed by bond products, with a proportion of about 40%, and savings ESG financial products account for the smallest, less than 3%.
Figure 7 ESG investment strategy and corresponding scale in Europe
Source: GSIA, CBN Research Institute
Since the launch of the EU Sustainable Finance Action Plan in 2018, in particular the new definition of sustainable investment in the Sustainable Financial Disclosure Regulation (SFDR), it has had a significant impact on the ESG investment market. The SFDR requires investment managers to incorporate sustainable risk into their investments, thereby integrating the sustainable investment strategies defined by GSIA, such as negative screening, normative screening and ESG integration into the expected processes for investing in financial products. To help investors, companies and issuers transition to a low-carbon economy, the EU Sustainable Finance Classification Regulation also came into force in 2020. This move contributes to the EU's 2050 net zero emission target and incentivizes capital flows to green and low-carbon areas. In addition, the European Commission has issued the Corporate Sustainability Reporting Directive (CSRD), which requires large companies to regularly publish reports on their social and environmental impacts. As EU policy continues to tilt towards ESG, sustainable investment trends in the European region are improving in the long run.
03. Current status of ESG investment in Japan
According to UNPRI, Japan will cover $2.87 trillion in sustainable investment assets in 2020, accounting for 8% of global sustainable investment assets, an increase of 34% compared to 2018, second only to Canada (48%) and the United States (42%). From 2020 to 2021, the number of PRI signatories in Japan increased to 102, adding 16 new ones, an increase of 18.6% year-on-year. As of June 30, 2022, a total of 115 companies in Japan had signed the PRI, including 79 asset managers, 25 asset owners, and 11 service providers (Figure 8).
Figure 8 Proportion of UNPRI signatories in Japan
Source: UNPRI, CBN Research Institute
Judging from the 2020 report of the Responsible Investment Forum of Japan (JSIF), White Paper on Sustainable Investment in Japan, the largest ESG strategy for sustainable investment is corporate engagement and shareholder action, followed by ESG integration. In terms of overall trends, the fastest-growing sustainable thematic investment strategy increased by 131.3% year-on-year from 2019, but the size of assets involved in corporate engagement and shareholder action declined by 12.6%. In addition, bond products accounted for 50.3% of Japan's sustainable investment assets and 47.7% of equity products. At the same time, Japan pays more attention to climate change and environmental issues (such as greenhouse gas emission reduction and marine pollution) in terms of the environment, pays more attention to the working environment (such as personnel training, etc.) in the social aspect, and pays more attention to the effectiveness of the board of directors, the company's listing policy and equity design in terms of corporate governance.
In 2021, Japan will release its Green Growth Strategy, which proposes to achieve net zero greenhouse gas emissions by 2050, and publishes the Basic Guidelines for Financing Climate Transition, which aims to strengthen the status of ESG sustainable investment. In addition, in 2021, the Tokyo Stock Exchange revised relevant documents such as corporate governance regulations to add sustainable themes such as climate change, labor fairness, and treatment.
The development status of ESG investment in China
In recent years, under the influence of sustainable investment concepts in Europe and the United States, China's ESG investment has developed rapidly and its scale has been expanding. According to UNPRI, as of June 30, 2022, 103 institutions in the Chinese market have signed the PRI (Table 4), of which 75 are asset managers, 4 are asset owners and 24 are service providers. Since 2012, China has been participating in UNPRI, and the number of contracts signed in 2017 is still single digits. Between 2017 and 2018, the number of signings surged. From 2020 to 2021, China was the fastest growing market for signings, with the exception of Latin America (77%), with an increase of 46%.
Figure 9 The proportion of UNPRI signatories in China
Source: UNPRI, CBN Research Institute
Figure 10 Number of UNPRI signatories in China
Source: UNPRI, CBN Research Institute
In terms of the number of PRI signatories in China, the number of ESG sustainable investment practitioners in the Chinese market is increasing. According to UNPRI, 10 financial institutions in China participate in the pilot project on climate and environmental information disclosure of Chinese and British financial institutions, covering banking, asset management and insurance, including Industrial and Commercial Bank of China (pilot coordinator), Bank of Jiangsu, Industrial Bank, Huzhou Bank, Huaxia Fund, E Fund, Ping An Bank, People's Bank of China, AVIC Trust and Aviation Industry Group of China, with total assets of about 50 trillion yuan. In addition, six Chinese mainland financial institutions, Huaxia Fund, Huabao Fund, Ping An of China, Harvest Fund, E Fund and China Southern Fund, have joined the Climate Action 100+ initiative to enhance climate-related disclosure through the implementation of the TCFD framework for climate-related financial disclosure.
The Chinese market's perception of ESG investment is still in its infancy. According to a survey by the China Responsible Investment Forum (China SIF), only 17% of individual investors know ESG investment (or words such as green finance, responsible investment, etc.), up 6% from last year, and 83% of respondents do not understand ESG investment. Although the understanding of the proportion and understanding is limited, most of these investors will consider ESG factors such as environmental protection, climate risk, emission reduction, business ethics, labor rights and safety in their investments, and the higher the understanding of ESG, the easier it is to adopt ESG investments. The survey also revealed that individual investors tend to filter strategies head-on, and that the majority of individual investors who have not factored in ESG factors say they will try ESG investment strategies.
Table 4 List of UNPRI signatories by China
Source: UNPRI, CBN Research Institute
The China Responsible Investment Annual Report 2021 divides China's main types of responsible investments (ESG investments in a broad sense, involving only any of the three ESGs) into green credit, sustainable securities investments and sustainable equity investments. At the same time, sustainable securities investment is divided into sustainable securities investment funds (including ESG public funds and ESG private securities funds), sustainable bonds (including green bonds, sustainable development bonds and social bonds) and sustainable wealth management products, and sustainable equity investment is divided into ESG private equity funds and green industry funds. Among them, the green credit balance market is the largest, reaching 14.7 trillion yuan, followed by green bonds with a scale of 1.65 trillion yuan. Although the ESG public fund market is not as large as green credit and green bonds, it is the most common ESG investment target for individual investors, and many individual investors are increasingly inclined to invest in ESG public funds. With the joint release of a public statement entitled "Working Together to Build a Sustainable Capital Market" by three large pension institutions in Britain, the United States and Japan, China's pension funds have gradually begun to pay attention to the ESG field. As a large-scale asset owner, the long-term investment attributes of pension funds are in line with ESG investment and are an important carrier and important driving force for ESG investment. According to the "China Pension Development Report 2021", international asset management institutions and overseas large pension funds have certain practices in ESG investment, and domestic pension fund asset management institutions are actively participating in and exploring. As a strategic reserve part of the pension system, the social security fund has become the forerunner of China's pension in ESG investment practice. According to the National Council of Social Security Funds, the investment income of the National Social Security Fund during the "13th Five-Year Plan" period totaled 685.7 billion yuan, and the size of the fund increased from 1,508.3 billion yuan at the beginning of the period to 2,459.1 billion yuan, with an average annual growth rate of 10.27%. At present, the mainstream of domestic ESG investment is still concentrated in stocks, green bonds, and public funds, which are not the main allocation areas defined by the pension fund policy. ESG investment by pension funds also faces a series of difficulties, including the low proportion of sustainable investment and the lack of uniform standards for information disclosure.
Table 5 Types and Scale of Major ESG Responsible Investments in China
Source: China SIF
01. Green credit
Green credit, often referred to as sustainable financing or environmental financing, is a financial institution that provides loan opportunities for sustainable business projects through credit, thereby supporting a green, low-carbon and circular economy, increasing the prevention of environmental and social risks in the management of loan business, and improving their own environmental and social performance. Compared to other types of responsible investments, the green credit market in China is the largest. According to GSIA and China SIF data, by the end of 2020, China's green credit balance was as high as 11.5 trillion yuan, accounting for 6.7% of the total loan size. In 2021, China's green credit balance rose to 14.78 trillion yuan, an increase of 28.58% over 2020, ranking first in the world.
China's green credit started earlier, and the introduction of the Green Credit Guidelines in 2012 brought green credit to the Chinese market into a period of rapid development. In December 2017, the People's Bank of China issued the Notice on Promoting the Pledge of Credit Assets and the Internal (Enterprise) Rating of the Central Bank, clarifying that from 2018, green loans that meet the internal rating standards of the central bank will be included in the scope of qualified collateral for monetary policy operations. In January 2018, the People's Bank of China issued the "Special Statistics System for Green Loans", requiring financial institutions to submit special statistics on green loans. A number of banks have introduced special subsidy policies for green credit, innovated green equity guarantee methods, and opened up green credit approval channels. According to the data of the Banking and Insurance Regulatory Commission, the overall quality of green credit assets is good, and the non-performing loan ratio has remained below 0.7% in the past five years, which is far lower than the overall non-performing level of loans in the same period.
02. Green bonds
Green bonds refer to securities issued by issuers in accordance with the law, and the funds raised are used to support the green industry and repay the principal and interest as agreed. At present, China's ESG sustainable bond investment is still in its infancy, but the asset scale has ranked among the top in the world. Sustainable bonds in the Chinese market are dominated by green bonds. According to data from China SIF that by 2021, China's green bonds will be 1.65 trillion yuan, accounting for about 9% of domestic ESG investment.
China's green bond market began in 2015, and the Catalogue of Green Bond-Backed Projects (2015 Edition) is the first green bond standard in China. In April 2021, the catalogue was updated for the first time, and the Catalogue of Green Bond-Backed Projects (2021 Edition) divides green projects into six major areas: energy-saving and environmental protection industry, cleaner production industry, clean energy industry, ecological environment industry, infrastructure green upgrading, and green service (Table 6). The update of the catalogue for the first time unifies the definition criteria of green bond projects by relevant management departments, and accelerates the integration and expansion of the green bond market. In June 2021, the People's Bank of China issued the Green Finance Evaluation Plan for Banking Financial Institutions, which includes green bonds and weights such as green credit to guide major banks to invest in and hold green bond assets. In September 2021, the Green Bond Standards Committee issued the Operational Rules for Market-oriented Review of Green Bond Evaluation and Certification Bodies (Trial) and related supporting documents, which regulate the green bond evaluation and certification industry and are of great significance to promoting the high-quality development of China's green bond market.
Table 6 Catalogue of Green Bond-Backed Projects (2021 Edition).
Source: People's Bank of China website, First Institute of Finance and Economics
03. ESG public funds
ESG public funds can be divided into ESG theme funds and pan-ESG theme funds, the difference between the two is that ESG theme funds need to cover three areas of ESG, and pan-ESG theme funds only need to cover any one or two areas of ESG. Due to the different definitions of the scope of ESG funds (especially pan-ESG funds), the statistics on the size of ESG funds by major institutions are also different. According to data from the China SIF fund, China's earliest pan-ESG public fund was launched in 2005, but the growth was slow before 2015, and the number of new funds added each year was in single digits. As of the end of 2014, there were only 31 pan-ESG public funds. Since 2015, more than 10 new funds have been added each year, and by the end of 2020, it has reached nearly 140. By the end of October 2021, pan-ESG funds have made a leap forward, with the number of products reaching 344, and the size of the funds has more than doubled in 2020, reaching more than 540 billion yuan. In particular, active pan-ESG funds account for about 67% of the total, and the income performance is strong, with positive growth rates of net value in the one-year and three-year ranges.
Although there are differences in classification, statistics from other institutions also show that ESG funds have entered a period of rapid growth in recent years. Wind data shows that from 2020 to 2021, there will be more than 50 new products issued by ESG public funds, and the total scale of new products will be close to 40 billion yuan. As of June 30, 2022, a total of 261 ESG public funds have been established in the ESG investment fund sector, with a total fund size of more than 360 billion yuan, of which 89 products with a scale of more than 1 billion yuan, accounting for 34.1%; There are 121 products with a scale of more than 500 million yuan, accounting for 46.4%.
From the perspective of establishment time and number, the number of ESG fund establishments in 2019-2021 increased significantly. In 2020, it will increase by 123% compared to 2019, and in 2021, it will increase by 138% compared with 2020. As of the end of June 2022, of the 261 ESG investment funds, a total of 108 have been established for three years or more, 90 have been established for five years or more, and a total of 85 within one year of establishment. The most common ESG public fund investment market in China is hybrid, equity and bond funds. According to the primary classification standard, hybrid, equity and bond funds accounted for 58.2%, 33.3% and 6.1% respectively.
In terms of fund performance, ESG funds perform better in the long term than in the short term. Within the range of traceability, ESG funds have returned an average of 24.8% over the last three years, 19.3% in the last two years, and -1.5% in the last year. As of the end of June 2022, the average growth rate of the net value of ESG investment funds in the three-year range of re-weighted units reached 104.0%, of which the hybrid and equity types reached 106.8% and 101.7% respectively, which performed well. The growth rate of the net value of the one-year interval re-weighted unit is quite different from the growth rate of the net value of the three-year interval re-weighted unit, with an average value of -1.5%, of which the growth rate of the stock type and the hybrid type is -1.5%, and the bond type is 0.2%.
From the perspective of fund rankings, ESG funds established in 6-8 years perform better than similar funds. Among the 261 ESG public funds, 93 and 59 have ranked in the top 50% and top 25% of the income of similar funds in the first-year classification standard in the past year, and the average establishment period of the fund is 6.3 years; 73 and 47 similar funds in the past three years have ranked in the top 50% and the top 25%, respectively, and the average establishment period of the fund is 9 years and 8.3 years.
In terms of fund volatility, ESG funds fluctuate slightly more than similar funds. As of the end of June 2022, about 76.6% of ESG investment funds had annualized volatility higher than the average of the same category of the primary classification standard in the past year, and about 88.1% of the annualized volatility of the previous three years was higher than the average of the same kind of standard in the primary classification standard. From the perspective of volatility, the stock type has the largest fluctuation, followed by the mixed type, and the bond type volatility is lower than the average of the same kind, and the stability is high.
Figure 11 The establishment time and number of ESG public funds
Source: Wind, CBN Research Institute
Table 7 List of ESG public fund products (top 50% of similar funds with three-year & one-year returns of similar funds more than three years old)
Source: Wind, CBN Research Institute
With the internationalization of the A-share market and the influence of the investment philosophy of European and American countries, the Chinese market's understanding of ESG investment has been deepening, and more and more ESG-related funds have appeared in the Chinese investment market. From the perspective of the establishment time of the fund, from 2018 to 2021, the issuance of ESG funds has a rapid momentum. But from a global perspective, ESG funds are still in their infancy in the Chinese market. China's ESG fund size still accounts for less than 2% of the world's total.
04. ESG Index
ESG funds and pan-ESG funds can also be subdivided into active and index types respectively. Active refers to the active investment method adopted by the fund manager to select stocks, and the index type refers to the passive investment method that tracks the relevant indexes in the ESG investment field. According to China SIF statistics, as of the end of October 2021, A-shares have released a total of 66 pan-ESG indexes on the Shanghai and Shenzhen exchanges. Among them, the National Securities Governance Index was first established in 2005. From 2008 to 2020, the number of pan-ESG indices increased steadily, with an average annual increase of about 4. In 2021, the number of pan-ESG indices will increase by 11, with rapid growth.
According to the statistics of the China Securities Index, as of 2020, there are 57 ESG indexes in China's domestic market, and the scale of ESG index funds exceeds 30 billion yuan, of which the scale of ESG ETFs is 18.9 billion yuan, which is a rapid increase from 2.6 billion yuan in 2019. Judging from the number of ESG indexes released in previous years, the number of releases in 2019 was 6.5 times that of the number of releases in 2018, and the number of issuances grew rapidly, adding 11 new ones in 2020. As of the end of June 2021, CSI has released a total of 70 ESG and other sustainability-related indexes, of which 56 are equity indices and 14 are bond indices.
ESG dispute cases and market and investor reactions
ESG disputes are instances or ongoing situations in which a company's operations or its products have a negative impact on the environment, society and corporate governance, including suspected violations of laws and regulations, or suspected violations of generally accepted international norms, global conventions, etc. In recent years, investors' tolerance for ESG controversies has been declining. When the negative news about corporate social responsibility is exposed, investors and even the market will give a strong negative reaction. For listed companies, the decline in stock prices is one of the most significant market reactions. More and more investors pay attention to ESG, hoping to make prejudgments before ESG disputes occur to avoid related risks.
The following are a number of listed companies that have experienced major ESG disputes in different industries in recent years, and list the cases from the perspective of environment, society and corporate governance. The market reaction is quantified as the price movement of each company's stock in order to observe and corroborate. In addition, a special ESG dispute case is selected to analyze the higher-level ESG issues that investors still need to pay attention to.
1 Environment class
Case 1: Volkswagen's "Emission Gate"
From 2006 to 2015, Volkswagen [XFRA:VOW] used software specifically designed to detect exhaust emissions by falsifying emission results, enabling cars to pass through inspections with environmentally friendly vehicle standards that exceeded statutory standards by dozens of times. In September 2015, the U.S. Environmental Protection Agency filed charges against this fraud violation. As the incident continued to ferment, many countries around the world launched investigations into local Volkswagen companies, involving a variety of popular models, up to tens of millions of vehicles. As of 2020, the company's fines, financial settlements, and buyback costs in this event have reached $33.3 billion.
Environmental fraud violations have had a huge impact on their stock prices, and the aftermath has not dissipated in the years since the incident. This is ostensibly an "E" incident brought about by environmental testing forgery, but inside it reflects the negligence of the internal control, risk management, compliance and legal functions of Volkswagen. Volkswagen told the outside world in 2020 that the company has completed the rectification of governance, risk control and compliance systems. It can be seen that before the ESG controversy, Volkswagen did not have risk management measures for such incidents. Similarly, investors are not highly sensitive to such ESG risks.
After the "emission gate" occurred, various ESG rating agencies listed Volkswagen as a high risk of ESG. After years of effort and self-corrective monitoring, Volkswagen's MSCI score has now increased from CCC to B, and Sustainalytics' ESG risk score has increased from "severe" to "moderate." The distrust caused by this storm of German car exhaust emission fraud is still very serious, and regulators in various countries are still strictly guarding against German cars. In 2021, the European Union fined German automakers BMW, Volkswagen, Audi and Porsche $1.3 billion for emissions conspiracy. At the same time, South Korea's antitrust regulator also said that it decided to impose a fine of 20.2 billion won on German automaker Mercedes-Benz and its South Korean subsidiary for false publicity and tampering with relevant pollution data. The string between investors and the market is always tight.
Case 2: BP Gulf of Mexico oil spill
On April 20, 2010, a blowout erupted on a deep-sea oil rig leased by BP called Deepwater Horizon, resulting in the death of 11 staff members and the injury of 17 others. Over the next three months, about 3.2 million barrels of oil poured into the Gulf of Mexico from a well beneath a deepwater horizon rig, making it the largest oil spill in U.S. history. Compared to the Exxon-Valdez oil spill in 1989, the Gulf of Mexico oil spill is 12 times the size of the former.
The U.S. Coast Guard and the Ocean Energy Administration, after conducting an investigation, believe that the main cause of the crude oil spill is a problem with the cement used to reinforce the well. When BP and Halliburton implemented the well cement project, the amount of cement injected into the well was reduced to save money, resulting in well safety problems. And before the accident, the oil well already had problems such as budget overruns and abnormal monitoring equipment.
The accident resulted in at least 2,500 square kilometres of seawater covered in oil, polluted water quality, severely affected local biodiversity, and caused many fish, birds, and marine life and plants to fall ill or die. Fisheries in Louisiana, Mississippi and Alabama have also been hit catastrophically. According to incomplete statistics from the U.S. government, the accident killed mammals, including 6,104 birds, 609 turtles and 100 dolphins, with extremely bad environmental and social impacts.
BP was asked by the U.S. federal government to set up a $20 billion fund to deal with the accident. In November 2012, BP reached a settlement with the U.S. government to accept a criminal fine of $1.256 billion, another $2.394 billion to the Wildlife Foundation for environmental remedial operations, and $350 million to the National Academy of Sciences. In addition, $525 million will be paid to the SEC over the next three years. On October 6, 2015, the U.S. Department of Justice announced that BP would settle with the U.S. government for $20.8 billion to completely settle all compensation for the oil spill. The amount includes all government-related claims, including claims from hundreds of local governments, fines under the U.S. Clearwater Act, and compensation for damage to natural resources. The $20.8 billion settlement cost also became the largest case settlement ever made by a U.S. judicial authority.
In the three months since the incident, BP's stock price has fallen by about 50%, its market value has shrunk by more than 100 billion US dollars, and then-CEO Tony Hayward resigned. BP was one of the first major energy companies to announce in 1997 that it would focus on addressing climate change and environmental issues. The company received high scores for social responsibility and disclosure and was included in the Dow Jones Sustainability Index sample. But a month after the oil spill, BP was removed from the index sample, taking into account the severity of the spill's long-term impact on the environment and local population, as well as the long-term damage and economic damage caused by the accident to BP's corporate image. Some of the funds that held the stock sold it off as soon as they were concerned about health and safety concerns, while others chose to continue to hold BP's stock, believing that BP remained a leader in alternative energy and other aspects.
The accident made BP the target of public criticism. Although BP has gradually recovered from catastrophic accidents through the company's governance efforts, it has never reached the glory of the accident.
2 Social class
Case 3: Rio Tinto bombs a cave in the reserve
In May 2020, Rio Tinto [ASX: RIO] blew up a 46,000-year-old rock reserve in Hamersley Ridge, Pierbara, Western Australia, to extract better quality iron ore. The Australian Parliament investigated the matter and held 13 public hearings. At the same time, the Parliament received more than 140 submissions from miners, heritage experts, indigenous peoples and civil society groups. Rio Tinto ignored the reserve's important role in the history of indigenous civilizations, prompting outcry and criticism from indigenous groups and investors. Finally, Rio Tinto's chief executive, Jean-Sebastien Jacques, and two key deputies were forced to resign in September.
This incident had a certain impact on its stock price and triggered huge public opinion in society. In the enterprise, there are few crises caused by "social permission" that cause CEOs to resign. Executives often think that the "S" in ESG is relatively soft and less prone to disaster. But when corporate mistakes in the "S" coincide with current societal concerns, anger can turn into powerful and costly political momentum. In today's increasingly social anxiety, inequality between races and classes often leads to the intensification of contradictions, and projected onto investors evolves into increasingly tough and rapid responses to social controversies in ESG.
Businesses need to build and value a strong social radar. Mining companies like Rio Tinto have many excellent financial, engineering, geological exploration, and even social science related experts among their executives, but in the face of different countries and different ethnic cultures, it is still necessary to select local talents who truly understand the needs of indigenous peoples and put the written social science knowledge on the ground. In this way, the risk of the destruction of some tangible cultural heritage can be successfully avoided.
Case 4: Elixir Biological Vaccine Incident
On July 15, 2018, a pharmaceutical company called Changsheng Biotechnology Co., Ltd. was ordered by the State Drug Administration to stop the production of rabies vaccines, withdraw drug GMP certificates, recall unused rabies vaccines, and impose a total of 9.1 billion yuan for the production of freeze-dried human rabies vaccines. On October 8, 2019, the Shenzhen Stock Exchange issued the announcement of the termination of the listing of *ST Changsheng (002680.SZ) shares, and Changsheng was delisted from the Shenzhen Stock Exchange due to major illegal acts, which was also the first company to delist due to serious damage to the national interests and social public interests.
The Changsheng problem vaccine incident can be traced back to November 2017, and after verifying that the company's DTP vaccine titer index did not meet the standard requirements, the Food and Drug Administration ordered the Food and Drug Administration to find out the flow direction of the DTP vaccine and was required to immediately stop using unqualified products. In just one month after that, the immortal creatures were found to be involved in five bribery cases. Less than a year after the DTP vaccine incident, Changchun Changsheng, a wholly-owned subsidiary of *ST Changsheng, was exposed to falsifying rabies vaccine production records. The cause was the real-name report of the old employees in the company's internal production workshop, and then the State Drug Administration set up an investigation team to carry out a comprehensive investigation, and found that the company's lyophilized human rabies vaccine production had fabricated production records and product inspection records, as well as the phenomenon of arbitrarily changing process parameters and equipment, which seriously violated the "Good Manufacturing Practice for Drug Production".
The State Drug Administration and the Jilin Provincial Food and Drug Administration have imposed a number of administrative penalties on Changsheng Biologics, including the revocation of the approval documents for Changsheng Bio's rabies vaccine drugs; Revoke the batch issuance certificate of biological products involved in the case, and impose a fine of 12.03 million yuan; Revocation of its Pharmaceutical Production License; 1.89 billion yuan of vaccines and illegal gains were confiscated, and a fine of 7.21 billion yuan was imposed on three times the value of the illegally produced and sold goods, and a total of 9.1 billion yuan was fined. In addition, the supervisors and other directly responsible personnel involved in the case shall be given administrative penalties for not engaging in drug production and business activities in accordance with law, and where they are suspected of committing crimes, the judicial organs shall pursue criminal responsibility in accordance with law. At the same time, in accordance with the relevant provisions of the Securities Law, the CSRC imposed a maximum penalty of 600,000 yuan on Changsheng Biologics, a warning to its directly responsible supervisors, and a maximum penalty of 300,000 yuan respectively, while taking lifelong market access measures. The other parties involved in the case were fined up to 300,000 yuan, and the three parties were banned from the securities market for 5 years.
After the vaccine scam of Changsheng Bio was exposed, the company's stock price fell for five consecutive trading days, and the market value evaporated by nearly 10 billion yuan five days after the incident. On July 23, 2018, Changsheng Bio issued an announcement that the company was investigated by the CSRC for suspected violations of laws and regulations on information disclosure, and the company's shares may have the risk of being delisted as warnings, suspended listings or terminated listings. In November 2018, the Shanghai and Shenzhen Stock Exchanges successively issued the Implementation Measures for the Compulsory Delisting of Listed Companies with Major Violations of the Law and the Implementation Measures for the Compulsory Delisting of Listed Companies on the Shenzhen Stock Exchange, revised the delisting rules, and included major illegal acts involving national security, public safety, ecological safety, production safety and public health and safety into the situation of compulsory delisting, expanding the scope of the delisting system. Among them, the pertinence of the "five security" is self-evident. On January 15, 2019, Changsheng Bio issued an announcement that it had received a decision from the Shenzhen Stock Exchange to impose a major illegal compulsory delisting of the company's shares.
As an A-share listed company, Changsheng Bio has caused losses to more than 16,000 investors, including many well-known domestic securities companies. Ordinary people who receive fake vaccines are innocent victims, and even if there is a problem vaccine compensation program, it will not be able to make up for and save their health and lives.
3 Corporate Governance
Case 5: Supply chain management of listed companies
In the March 15, 2022 evening party, it was exposed that two pickle production enterprises, Huarong County Flag Vegetable Industry and Jinrui Food Co., Ltd. in Hunan Province, had the problem of purchasing "pit of sauerkraut" from the purchased part. On the same day, Master Kong Holdings Co., Ltd. issued a statement acknowledging that Hunan Flag Planting Vegetable Industry Co., Ltd. is indeed one of the suppliers of sauerkraut bags, and has immediately suspended its supplier qualifications, cancelled all cooperation, and sealed its sauerkraut bag products. On the same day, Unity Enterprise (China) Investment Co., Ltd. also issued a statement on the use of sauerkraut bun raw materials, indicating that Hunan Flag Planting Vegetable Industry is not a supplier of Unity Enterprise, and its official website is false information. Once the supply chain problem was exposed, the stock prices of both Master Kong and the unified enterprise fell (Figures 12 and 13).
Supply chain management risks are transmissive and collateral. For Master Kong, there is a problem with the quality of the supplier's products, which directly leads to a big leak in Master Kong's products themselves. As a food manufacturer, food safety directly violates the basic rights and interests and health of consumers, and such negative news may cause consumer resistance to Master Kong. The decline in the stock price of the unified enterprise is due to the collateral effect of the negative public opinion of the supply chain. Consumers and investors will naturally think about whether products in the same type of industry also have such risks, so similar products have also been hit by negative public opinion.
Now the information of upstream and downstream suppliers is becoming more and more public, the speed of information dissemination is getting faster and faster, and the supply chain has become the focus of investors. Enterprises also need to do a good job in risk management of the supply chain, integrate suppliers into the ESG management of enterprises, and make suppliers and enterprises work in the same direction of interest.
Figure 12 Stock price trend of Master Kong Holdings [HK:00322].
Source: Oriental Fortune Network
Figure 13 Stock price trend of Unified Enterprise China [HK:00220].
Source: Oriental Fortune Network
Case 6: Luckin Coffee Financial Fraud
In February 2020, Muddy Waters Research published a research report pointing out that Luckin Coffee, a Nasdaq-listed Chinese stock company, fabricated financial and operational data and exaggerated daily merchandise sales per store. On April 2, Luckin admitted that the fictitious transaction amount was about 2.2 billion yuan, and then the stock price plunged 80%, and the intraday suspension of trading several times. The China Securities Regulatory Commission issued an announcement strongly condemning the financial fraud incident of Luckin and said that it would strictly follow the relevant arrangements for international securities regulatory cooperation and verify the relevant situation in accordance with the law.
The "G" crisis, caused by the failure of the financial audit mechanism and the lack of internal controls, had a huge impact on Luckin Coffee, and its stock price plummeted. Subsequent layoffs, store closures, and the suspension of business-related projects directly threaten the fundamental rights and interests of employees, consumers and investors. The inability to be transparent and transparent and to submit financial reports to the SEC that meet the requirements of U.S. GAAP is a lack of internal audit, internal dialogue and internal risk management for Luckin. In addition to the lack of sufficient accounting and financial reporting personnel, corporate management has not explored and explored potential risks. The financial fraud incident of senior executives has involved criminal liability, including fraud, and will directly face the early warning of delisting, trapping investors in the foreseeable serious financial risks.
4 Special cases
Case 7: The Chilean lithium resource mining contract that BYD bid high for was suspended
In early 2022, BYD bid $61 million for a contract to mine 80,000 tons of lithium resources in Chile. However, on January 14, local time, two days after the bidding for the contract, the local court of Chile announced that it had decided to accept the appeal of the governor of the state of Kopiapo where the lithium mine is located, and the indigenous community near the salt lake of Atacama immediately suspended the ongoing bidding process for the lithium mining contract, and asked the Chilean mining minister, who is responsible for promoting the matter, to submit a corresponding report within ten days.
The appellant stated that the bidding scheme violated the principles of environmental protection and economic development. However, this lithium mine storm is actually not that simple. Unlike the case 2 in which Rio Tinto blew up the caves in the reserve, triggering an outcry from indigenous groups and investors, the core uncertainty of the winning bid for lithium resource extraction is the change of leadership in Chile. Former President Sebastián Piñera conducted the tender three months before the end of his term. He hopes to reverse Chile's decline in the global lithium market share. The newly elected president, Gabriel Boric, advocated stronger state regulation, opposed the privatization of mineral resources, and promoted the establishment of a state-owned lithium company, which brought uncertainty to Chile's lithium mining.
In the case of BYD, it is largely not the company's ESG mistakes that have caused dissatisfaction in the local community. Instead, under the strong political momentum, the contradictions between the indigenous people and the foreign elite have intensified on the issue of resource allocation. New President Boric opposes the privatization of mineral resources and emphasizes the establishment of state-owned lithium companies, then foreign bidders are strong competitors and enemies. Perhaps during the presidency of former President Piñera, the indigenous people were dissatisfied with lithium mining but their opinions were not adopted, and perhaps the unequal distribution of resources existed in the local society, but after this change, the multinational companies that successfully bid have become the target of public criticism. The local indigenous community shifted hostility onto outsiders, which eventually led to the appeal related to the ESG controversy. Then, it is worth investors' attention that when making cross-border or higher-level investments, they also need to be vigilant against higher levels of ESG risks, especially in the face of "S" and "G" type disputes, which need to take into account the local social history and culture and even the level of regional or national governance.
ESG investment-related policies and opportunities in China
In order to effectively cope with climate change and shift the economic development model from resource-consuming to sustainable development, China has issued a series of relevant policies in the past decade or so, which have become a powerful driving force for the subsequent development of ESG investment in the Chinese market (Table 8).
In 2005, the State Environmental Protection Administration and the State Council successively issued the Opinions on Accelerating the Evaluation of Environmental Behavior of Enterprises and the Decision on Implementing the Scientific Outlook on Development to Strengthen Environmental Protection, which reformed and innovated environmental policies and management systems, which to some extent means that China has gradually begun to attach importance to the performance of enterprises in ESG. In 2006, the Shenzhen Stock Exchange issued the Guidelines on Social Responsibility of Listed Companies, encouraging listed companies to issue Corporate Social Responsibility (CSR) reports in accordance with the requirements of the guidelines, which is also an early practice of ESG sustainable investment information disclosure in China. In 2008, the SSE issued the Guidelines for Environmental Information Disclosure of Listed Companies, which guided listed companies to actively fulfill their social responsibilities to protect the environment and further strengthened the information disclosure requirements for corporate ESG. In 2012, the Green Credit Guidelines were the first national green finance policy issued by China. In 2015, the General Plan for the Reform of the Ecological Civilization System for the first time clearly proposed the construction of China's green financial system.
In 2016, in order to promote healthy competition and green development of venture capital, jointly maintain good market order, and establish the value concept of "responsible venture capital", the State Council issued the Several Opinions on Promoting the Sustainable and Healthy Development of Venture Capital. In the same year, the Guiding Opinions on Building a Green Financial System issued by the central bank required key emitters to carry out compulsory information disclosure, and improved the mandatory environmental information disclosure system for listed companies and bond-issuing enterprises, and formulated the future green finance development path of the mainland. According to the China Green Finance Policy Database, there have been more than 700 green finance policies at the national and local levels since 2016. These policies cover different pilot regions, industries and businesses, and involve the establishment of a green project registration platform and the provision of tax and financial incentives for investors and issuers. Under the background of the "double carbon" goal, keywords such as ESG sustainable investment and green finance have attracted more and more attention from domestic institutional investors. In October of the same year, the Ministry of Ecology and Environment, the National Development and Reform Commission, the People's Bank of China, the Banking and Insurance Regulatory Commission and the China Securities Regulatory Commission jointly issued the Guiding Opinions on Promoting Investment and Financing to Address Climate Change, which is the first ministerial document on climate change mitigation after China announced the 2060 carbon neutrality target. The document highlights the need for regulators to support and incentivize financial institutions to develop climate and green finance-related products and projects.
During the 14th Five-Year Plan, China vigorously promoted the construction of ecological civilization. In 2021, policy factors are the most important factors in promoting ESG development. In July, the National Development and Reform Commission issued the "14th Five-Year Plan" for the development of circular economy, vigorously developing the circular economy and promoting intensive recycling of resource conservation. In August, the People's Bank of China issued the financial industry standard "Guidelines for Environmental Information Disclosure of Financial Institutions", which systematically expounded the principles, forms and content requirements for environmental information disclosure of financial institutions. In September, the "1" in the "1+N" policy system of the double carbon target was officially released, and the "Opinions on the Complete, Accurate, and Comprehensive Implementation of the New Development Concept to Do a Good Job in Carbon Peak Carbon Neutrality" specifically emphasized the active development of green finance, which set the "double carbon" tone for future ESG investment and green finance development. China's ESG policies have followed, and the "five pillars" of the green finance policy system have been further improved, including the standard system, information disclosure, incentive mechanism, product innovation, and international cooperation, laying a solid foundation for ESG investment and green finance development in the Chinese market in the future.
Table 8 Major ESG-related policies in China (excluding Hong Kong, Macao and Taiwan).
Source: Asset Management Association of China
The development trend of ESG investment in China
The strategic deployment of guiding financial resources to the field of green development has led to the rapid development of carbon finance businesses such as ESG investment. Listed companies are the main body of the carbon neutral strategy, and ESG, as the embodiment of the concept of sustainable development in the investment field, provides market participants with green investment tools. At present, the investment ecology around the sustainable concept of ESG has been initially formed, pensions, insurance and other medium- and long-term funds will gradually take the ESG concept into consideration, and more funds will flock to sustainable development projects, thus creating a sustainable financial investment ecology and better contributing to the strategic goal of carbon neutrality.
01.
The Paris Agreement's setting of China's Nationally Determined Contribution targets has led investors to place greater emphasis on sustainable projects
In addition to reaching a consensus to limit global temperature rise by 2°C and try to limit it to 1.5°C, China has committed to reducing carbon dioxide per unit of gross domestic product (GDP) by more than 65% by 2030 compared to 2005, and increasing the use of non-fossil fuels in primary energy to about 25%. This move makes sustainable projects such as wind power and photovoltaics an important investment direction, and the simple elimination strategy of the past can no longer meet the specific climate goals in the Paris Agreement, and ESG investment projects including renewable energy will receive more attention, and more investors will focus on ESG investment.
02.
The strategic deployment of carbon peaking and carbon neutrality targets allows investors to take carbon emissions into account
The 14th Five-Year Plan and the 2035 long-term goals and other relevant policy documents have clearly defined China's determination and commitment to achieve carbon peak by 2030 and carbon neutrality by 2060, and the status of green finance-related investments such as energy conservation and emission reduction and low-carbon transformation will continue to enhance in China's economic structure, and achieving high-quality and sustainable economic development will become an important part of China's future economic construction and development. The number of low-carbon and climate-mitigating financial products in the Chinese market will continue to increase, and ESG investment will usher in new opportunities.
03. The COVID-19 pandemic has become an important consensus to promote sustainable development concepts such as ESG
After the COVID-19 pandemic, achieving sustainable development will be the theme of the post-pandemic era. Policymakers and investors will pay more attention to environmental protection and social responsibility, and there will be stricter requirements for corporate ESG information disclosure. At present, the Hong Kong Stock Exchange of China has required enterprises to disclose ESG information mandatory, Chinese mainland more and more enterprises have voluntarily disclosed ESG-related social responsibility reports, ESG investment may become a mainstream form of investment.
04.
Sustainability-related policies will continue to be an important driver of the ESG investment market
In recent years, China's policies in green finance-related areas have grown rapidly, effectively promoting the flow of funds in the direction of ESG. Internationally, countries have successively announced carbon neutrality targets, guided the steady development of global ESG investment, accelerated the process of China's ESG investment to a certain extent, and expanded the scale of ESG investment. In China, in order to build a new development pattern with the domestic cycle as the main body and the domestic and international dual cycles promoting each other, and forming a green, low-carbon, circular development economic system, the relevant policies introduced by China have become an important driving force for ESG investment, and the effect is remarkable. In the future, ESG investment in the Chinese market will be closely related to the policy direction, and the policy will continue to be one of the most important driving forces for the sustainable investment market.
The challenges of ESG investing in China
01. The ESG investment concept has not yet been popularized, and enterprises lack the initiative to disclose information
Judging from the ESG or social responsibility reports issued by existing A-share listed companies, most of the ESG-related information disclosed by enterprises only stays in the mandatory part of the policy document, and does not mention some relevant aspects of ESG, such as carbon emissions and biodiversity maintenance. Most of the enterprises that mention energy conservation and emission reduction are only a passing mention, and do not put forward specific implementation methods and measures. ESG investment concepts are still emerging concepts in the Chinese market, and it will take time to implement ESG information disclosure.
02. ESG information disclosure is limited and policies lack uniform standards
China's ESG investment is still in its infancy, and the ESG information disclosure system has not yet been perfected. At present, for listed companies that generate a large amount of carbon emissions, they only require the disclosure of pollutants such as sulfur dioxide and nitrogen oxides, and do not require the disclosure of carbon emissions and other information, and the companies that voluntarily disclose information are still a minority. Due to the lack of unified information disclosure standards, the degree of information disclosure of enterprises is uneven.
03. The ESG evaluation system is different, and the evaluation results are different
In recent years, ESG has developed rapidly, and the international scoring system is not fully applicable to China, so the research and development of scoring systems in China has also accelerated. However, different agencies define ESG differently and have different weighting methods, resulting in different evaluation scores under different evaluation systems. How to reconcile the differences between different rating results and make ESG ratings more standardized and standardized is also one of the challenges facing China's ESG investment.
Countermeasures and suggestions for promoting the development of ESG investment in China
01.
Promote the ESG investment concept and further increase the number and scale of high-quality ESG products
In order to promote the high-quality and sustainable development of the mainland economy and achieve systemic changes in the economy and society, it is the trend of the times to promote and practice the concept of ESG investment. The mainland should continue to promote the concept of ESG sustainable investment, raise investors' awareness of responsibility, and guide the financial system to turn to green and low-carbon. In addition, from the perspective of ESG products, the scale and quantity of pan-ESG products are much larger than those of ESG products. China should further standardize the scope of ESG products, guide the development of pan-ESG products into pure ESG products, and promote the high-quality development of ESG investment.
02. Standardize the ESG information disclosure system and improve the quality of information disclosure
The ESG information disclosure system is the framework of ESG scoring, and the improvement of ESG information disclosure systems for enterprises is the basis for the development of ESG investment. Policy makers should issue relevant systems and documents to standardize the ESG information disclosure system, improve the quality of enterprise information disclosure, and enable enterprises to disclose key information in a targeted manner.
03. Promote the standardization and standardization of ESG evaluation, and increase policy drive
The development and improvement of the ESG evaluation system is closely related to the ESG score, and the ESG score is an important reference for ESG investment. Relevant government departments should promote the standardization and standardization of the ESG scoring system as soon as possible in accordance with the actual situation of the Chinese market and the suggestions of experts and other relevant people. At the same time, we will continue to maintain policy factors to drive ESG investment in the domestic market, and gradually increase policy-driven efforts to make ESG investment develop steadily in the Chinese market.
(The title of this article Source: CBN)
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Producer| Yang Yudong
Planning | Yu ship
Lead writer | Liu Huiwen Li Ye
Edit | Yu Ming
Validation | Yu Ship Ma Shaozhi
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