Source | Zero One Finance
Author | Li Wei
2021 can be seen as a "year of explosion" for global ESG investment. In the post-COVID-19 era, global investors are increasingly advocating responsible investment and promoting sustainable investment methodologies. Under the national strategic background of "carbon peaking and carbon neutrality", listed companies pay more attention to ESG information disclosure, and investors actively use ESG principles to explore the long-term value of high-quality targets. Looking at the world, the scale of ESG-related funds has exceeded 2 trillion US dollars, and the Asia-Pacific region is especially favored by international institutional investors, and it is expected that ESG investment in this region will continue to show rapid growth in the future.
In this context, Luxe & Co., Ltd. (NYSE:LU) recently released its first ESG report, showing its practical achievements in ESG top-level design, green finance, consumer service and protection, and investor education. Previously, FTSE Russell, a well-known index compiler under the LSE, also announced that Lu Jin Holdings would be included in the two major ESG theme indexes.
As a leading enterprise in the financial technology track, the achievements achieved by Lujin Holdings in ESG have a positive industry demonstration effect. According to the report, Lujin Holdings has promoted green inclusive finance with science and technology, and has formed a characteristic strategic layout of "small and micro credit + rural revitalization" - its practical results have confirmed the evolution path of ESG investment concept over the years to some extent, and also provided a certain feasible reference for the development of ESG in the field of financial technology.
First, the global wave of ESG: investment in new outlets, The expansion of the European and American markets
The development process of ESG investment can be roughly divided into three stages:
The first phase was ethical investment in the 1920s-1960s. This investment philosophy stems from the investor's own beliefs or pursuit of social values, which is represented by the Religious Fund, which investors will abandon the investment objects they consider "immoral", such as oil heavy industry that destroys the environment, weapons manufacturing that affect peace, tobacco that is harmful to the health of the public, etc.;
The second phase is socially responsible investing in the 1960s-1980s. This concept is easier to understand than ethical investment, and it has arisen with the development of environmental protection concepts. With the rapid economic growth, the world is facing more and more severe climate, environment, resource challenges, in the 1960s and 1970s began the European and American public environmental protection movement, and then in 1971, the United States' first social responsibility mutual fund "Pyx World Fund" came out;
The third phase is modern ESG investment since the 1990s. What is ESG? E stands for environmental, S stands for social, and G stands for governance. The concept of sustainable development and green finance is becoming more and more popular, and the concept of ESG values and evaluation tools is becoming more and more mature.
Figure 1: Evolution of the philosophy of ESG investment
Source: CICC Research Department
After decades of development, ESG investment has moved from developed markets to the world, showing an explosive growth trend. According to data disclosed by the Global Sustainable Investment Alliance (GSIA), the AUM of ESG investments around major regions of the world (Europe, the United States, Canada, Japan, Oceania) increased from $13.2 trillion in early 2012 to $35.3 trillion in early 2020, with a compound annual growth rate of 13.02%. Far exceeds the overall growth rate of the global asset management industry (6.01%).
Figure 2: ESG Investment Scale vs Total Assets Under Management in Major Regions of the World (In Trillions of US Dollars)
Source: GSIA, CICC Research
It is worth noting that according to the data reviewed by Zero One Think Tank, as of the end of the second quarter of 2021, the size of global ESG-related funds exceeded $2 trillion. The special COVID-19 pandemic has caused many investors to stop looking at the profitability and operating performance of enterprises and move towards an investment methodology that advocates social responsibility and sustainable development. This investment philosophy is currently highly sought after by the capital market, and as of the end of June 2021, the annualized yield of the MSCI Global ESG Leading Index since 2016 is 13.6%, 2.3 percentage points higher than the benchmark index.
Figure 3: Global ESG Sustainable Fund Market By Geography
Source: Compiled by Industrial Securities Research Institute of Economics and Finance
Figure 4: The MSCI Global ESG Leading Index continues to outperform the benchmark index
Source: Bloomberg, MSCI, Ping An Securities Research Institute
From the perspective of China's ESG investment development, the latest data as of October 2020 shows that the total size of ESG funds in the A-share market is currently about 128.7 billion yuan. For mass investors, the most accessible is the ESG fund. Among them, the number of pure ESG theme funds is small, mainly focusing on the pan-ESG field. Overall, the domestic ESG investment practice has been carried out for a relatively short time, and in recent years, institutions including China Securities Index, SynTao Ronglu, Ping An of China, Harvest Fund and other institutions have continued to explore a localized ESG evaluation system. With the rise of the wave of ESG investment, Listed companies in China are also more cautious about investors' investment decisions based on ESG ratings, which has become an important symbol of the sustainable development ability of enterprises.
In addition, for the evaluation of ESG investment in the Asia-Pacific region, international investment institutions as a whole predict that the Asia-Pacific region will lead the high-growth development of global ESG in the future, such as:
Hu Bingxi, head of responsibility and sustainable investment research at UBS Asia Pacific, pointed out that China has shown a rapid development trend in the field of ESG investment, and the number of public funds for ESG in 2020 has reached or even exceeded 127, and the scale of funds represented by them has doubled compared with 2015;
According to a sustainable investment survey disclosed by HSBC Investment Management, about half of the investors surveyed in the Asian market believe that their portfolios will be 100% sustainable over the next 3-5 years, compared with only 34% in the UK. Multi-asset ESG investments are highly sought after by respondents in Hong Kong and Singapore, while Chinese mainland respondents prefer thematic funds;
Mark, assistant general manager of Sino-Italian Asset Management, said that ESG and financial technology are both powerful tools for institutions, and as asset management institutions, it is necessary to decide how to carry out ESG investment related work in terms of strategy, capital, organizational structure, human resources, investment processes, etc.
2. ESG Index and Rating: Lujin Holdings is included in the two major indexes
In recent years, the concept of ESG has become an international consensus, and studies in academia have shown that ESG is regarded as an intangible asset of a company, and this intangible asset will enhance the business and social moral image of the enterprise, so that it can achieve long-term value growth. With the increasing impact of ESG factors on enterprises, a number of professional ESG rating agencies have emerged in Europe and the United States to evaluate, measure and compare the esG performance of companies, prompting investors to integrate ESG and financial goals into the investment decision-making process.
The relevant research results of the OECD show that there are currently more than 100 ESG rating agencies in the world, and the mainstream is MSCI, Refinitiv, RobecoSAM, FTSE, etc., and the average correlation coefficient of the rating results is about 0.6. Each institution has an independent set of methods for calculating and measuring ESG standards, with MSCI, the world's largest index company, more authoritative. Compared with other institutions' ESG ratings, MSCI has the advantage of not only analyzing whether a company complies with environmental policies and other factors, but also comprehensively looking at how the company's carbon emissions or corporate governance risks will affect its business model, cash flow and other long-term value realization. Over the last 3-, 5-, and 10-year periods, the MSCI Emerging Markets ESG Leading Index has all had higher annualized yields, lower annualized volatility, and maximum drawdowns.
Focusing on China's local practices, 2018 is a "key year" for ESG indices and ratings. The official inclusion of A-shares in the MSCI Emerging Markets Index began in June 2018 to explore ESG ratings. At the same time, the first ESG index in China, the CSI 180ESG Index, was released in 2018, and the Asset Management Association also released the "Research Report on the ESG Evaluation System of Chinese Listed Companies" in this year. Therefore, China has officially been included in the MSCI Emerging Markets Index favored by global investors since 2018.
Zero One Think Tank noted that on the eve of the release of the ESG report by Lujin Holdings, September 2021 was just included in the two major ESG indexes. FTSE Russell, a well-known index compiler under the LSE, announced that it has included Lu jin holdings in its two major ESG-themed indexes, the FTSE Emerging ESG Low Carbon Select Index and the FTSE Asia ex Japan ESG Low Carbon Select Index. The above index changes took effect after the market close on September 17.
This move means that the global capital market recognizes Lujin Holdings in terms of sustainable development and green ecological construction, and its achievements in environmental protection have attracted international market attention. Ji Guangheng, chairman of Lujin Holdings, said that as a technology-driven personal financial services platform, Lujin Holdings will be committed to using technology to promote green and inclusive finance, implement a low-carbon development strategy, and strive to become a model of compliance governance among overseas listed companies.
Third, focus on China's ESG: information disclosure needs to be improved, focusing on sustainable development capabilities
Since entering 2021, China's regulators have successively issued a number of policy guidelines on ESG information disclosure, and the newly revised "Guidelines for the Content and Format of Information Disclosure of Companies Publicly Offering Securities No. 2" in June 2021 pointed out: "The new environmental and social responsibility chapter requires the disclosure of administrative penalties imposed by companies due to environmental problems during the reporting period, and encourages voluntary disclosure of carbon emissions, rural revitalization and other related work".
Compared with developed countries in Europe and the United States, the number of A-share listed companies that actively disclose ESG reports is relatively low, and the scope and quality standards of information disclosure need to be further improved. At present, more and more Chinese companies are also carrying out global strategic layout and increasing market share. Therefore, if Chinese-funded enterprises want to win the recognition and support of the international capital market in this process, they need to pay more attention to the standardization of ESG information disclosure and establish a sustainable market image. Overseas investors are more interested in the ESG rating performance of listed companies as an important basis for whether to invest.
In terms of financial technology in deeply empowering ESG investment, a group of leading institutions have continued to advocate the concept of sustainable development since entering 2021, indicating their determination to achieve long-term value. In the ESG report released by Lujin Holdings, it clearly pointed out that it built the top-level design of ESG and its series of initiatives, of which 3 achievements attracted the most attention:
The first is to formulate the "Environmental, Social and Governance (ESG) Management System of Lujin Holdings Co., Ltd." and set up a green finance office, formulate three major green financial business directions such as "science and technology empowerment to help financial institutions save energy and reduce emissions", "green product introduction" and "fundraising to support green projects", and promote the low-carbon emission reduction model of financial institutions;
Second, the board of directors of Lujin Holdings is the highest decision-making body for ESG management, and has set up a consumer protection and ESG committee to comprehensively supervise consumer protection and ESG matters;
Third, the United Land Fund has launched a number of pan-ESG public offering products, and will continue to introduce ESG-related public offering products and underlying assets in a targeted manner in the future, and invest in other net worth products in the field of green finance, energy conservation and emission reduction. At the same time, Lujin Holdings has successively launched a "wealth cloud" service that integrates financial technology and operational experience, providing a wealth management platform for small and medium-sized banks in cooperation. In addition, the NPS ranking of the wealth management business controlled by Lujin remains the first in the industry, and the comprehensive advantages of services, products and brands are leading the industry.
Figure 5: ESG governance structure controlled by Lukkin
Source: Lu JinSuo Holdings "2020 Environment,
Social and Governance Report
Fourth, science and technology drive green finance: "small and micro credit + rural revitalization" to shape the digital intelligent ecology
Under the ESG boom, the state advocates the transformation of the real economy in the direction of carbon emission reduction and low carbon environmental protection, and requires financial institutions to significantly reduce the scale of credit for industries with high energy consumption and high pollution. In view of this, the green finance business is heating up rapidly, based on digital intelligent technology and the policy orientation of supporting the financing of small and micro enterprises, a number of financial technology companies have accelerated the development of green credit services for small and micro enterprise customers.
Among them, Lujin Holdings adopts the innovative development strategy of "small and micro finance + rural revitalization" to create a unique "AI + O2O" service model, showing its development positioning of digital inclusive finance. According to the ESG report data disclosed by it, in 2020, Lujin Holdings has helped more than 1.24 million small and micro enterprises, 2.76 million inclusive financial credit services, and the balance of inclusive credit management loans during the reporting period reached 545.149 billion yuan. At the same time, the concept of green finance has also prompted the industry to pay more attention to ecological agriculture, and the rural revitalization strategy has become the main line of operation for serving the three rural areas.
Lujin Holdings continued to explore the financial technology model of helping farmers, and in 2020, Lujin Holdings provided about 120 million yuan of financial support for the "three rural areas" group. Among them, Ping An Puhui and a number of institutions launched the "Huinong Loan" service, which has accumulated more than 100 million yuan in Chongqing, Guizhou, Shaanxi, Hainan and other regions; another featured product is the "HuinongJin" launched by Ping An Puhui, which focuses on female entrepreneurs in poor areas, helping women to create and find employment in an all-round way, and helping them achieve economic self-reliance. By the end of the reporting period, Ping An Puhui had provided a total of 16.6 million yuan of interest-free benefits to rural cooperative leaders and rural entrepreneurs, directly supported more than 600 poor households, and increased the average household income by more than 10,000 yuan.
In addition, Lujin Holdings has also created a new model of "industrial poverty alleviation + ecological poverty alleviation", and jointly launched the "Big Country Town" industrial poverty alleviation plan with the China Foundation for Poverty Alleviation, and innovatively embarked on a characteristic public welfare road that combines rural industrial poverty alleviation and ecological environmental protection with the cooperation mechanism of "government + community + social organization (social enterprise)". The project helped 21 bee farmers in Sichuan Pingwu Honey Cooperative increase their income by 1600 yuan, 377 bee farmers in Yunnan Deqin Honey Cooperative increased their income by 800 yuan, and 29 bee farmers in Guizhou Xishui Honey Cooperative increased their income by 6000 yuan, benefiting more than 1500 members.
In particular, it should be pointed out that in response to the issues of personal privacy protection and data security repeatedly emphasized by the regulatory authorities in 2021, Lujin Holdings has set up an information security management committee, and the information security management system launched by the Ministry of Public Security has passed the Ministry of Public Security Information System Security Level Protection (Level 3), ISO20000 and ISO27001:2013 Information Security Management System Certification. At the same time, in order to protect the legitimate rights and interests of borrowers, Lujin Holdings, in collaboration with local public security anti-fraud centers, consumer associations, communities, universities, etc., launched a special plan for improving financial consumer literacy "Maintenance C Action", as of December 31, 2020, it has held more than 300 offline financial knowledge popularization activities, covering more than 10 million people.
5. Summary
2021 can be seen as the "outbreak year" of ESG investment, under the guidance of the national strategy of "carbon peaking and carbon neutrality", investors are more focused on the latest trends in the ESG fund market. Since its inception, ESG investment has gone through decades of expansion from the European and American markets to the world. 2018 is a "key year" for ESG indexes and ratings, and since then, A-share listed companies have also paid more attention to social responsibility and ESG information disclosure. As of the end of the second quarter of 2021, the size of global ESG-related funds exceeded $2 trillion.
Lujin Holdings' latest first ESG report released in September 2021 reflects new opportunities for fintech-driven ESG investment funds, which have just been included in the two major ESG indices. Returning to the perspective of digital inclusive finance, green finance under the concept of ESG has attracted attention, and Lujin Holdings has built a digital intelligent ecology of "small and micro credit + rural revitalization", thus showing a personal financial service platform that practices the concept of inclusiveness and supports the real economy in the industry.
【Reference】
【1】Ping An Securities.(October 2020)."Dismantling ESG Investment Series (I) Overview: ESG Investment, Sustainable Future"
【2】Ping An Securities(July 2021)"Dismantling ESG Investment Series (4) Equity: ESG Equity Investment, New Forces for Change"
【3】Ping An Digital Economy Research Center(November 2020).ESG Investment in China
[4] China ESG Research.(March 2021).Research on the Development of ESG Evaluation Practice abroad
CICC (Sep. 2021). ESG Research Series (4): ESG Strategy Change and Product Development
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