China should Speed up Ecological Construction of ESG Investment

Under the impact of the COVID-19 pandemic, investment models based on environmental, social, and corporate governance (ESG) are accelerating to become the trend in the investment field. Facing such change, Chinese regulators and market participants, as participants in the financial sector and advocates of global environmental governance, will also need to handle this new trend and adjust accordingly.

This year, China, Japan, South Korea, and the European Union have stepped up their efforts to implement the Paris Agreement’s emissions reduction targets. Although the United States has formally withdrawn from the Paris Agreement, Joe Biden, who is likely to become the new U.S. President, has indicated that he would seek to return to the agreement as soon as possible, implying a major change in U.S. policy on environmental issues in the future. As a result, the environmental and emission reduction constraints of countries will increase in the future, and countries will invest in higher amount of funds and technologies to promote the application of new energy and new technologies in the infrastructure construction, energy sector, and the new economy sector. These sectors are also deemed as new drivers of future economic growth. On the one hand, the industrial structure of the fixed assets needs to be adjusted. On the other hand, the construction of new sectors requires substantial investment and the financial markets to achieve the environmental goals. In this context, the ESG investment model will become an important part of the investment and financing ecosystem.

In fact, ESG investment is not only socially or morally advantageous, but also provides substantial benefits to investors. Several overseas studies have shown that investments with ESG characteristics tend to provide more stable and long-term returns to investors, because these ESG companies tend to pursue long-term development rather than short-term speculation. At the same time, ESG-rated companies have a higher degree of transparency, making it easier for investors to understand the company’s business conditions, which is the reason why more and more overseas investors are turning to ESG investments. Global asset prices have suffered sharp declines as a result of the pandemic, but companies with stronger ESG performance have not only performed better than their peers, but also had less volatility and downside risks. In China’s A-share market, some analysts believe that the pandemic has led investors to find that listed companies with better ESG management perform better than those with less satisfactory ESG management in terms of both action and production recovery capacity.

At present, ESG investment has increasingly become an important part of the international financial sector. According to the latest statistics from the Global Sustainable Investment Alliance (GSIA), in 2019 alone, more than USD 18 trillion of global assets under management incorporated ESG factors into investment decisions.

In this regard, China’s ESG investment can be said to have just started. Data show that as of October 26, there have been more than 15 public offering of funds focusing on ESG investment in China, with a total fund size of about RMB 76.6 billion, an increase of more than 32 times over the same period last year. In addition, many private equity investment institutions have also studied ESG investment strategies as an important part of the A-share investment model. Since 2019, global pension funds and other large international asset management institutions have listed ESG investment strategy as an indispensable “entry threshold” when choosing domestic investment institutions to entrust A-share investment fund management.

However, China’s A-share market has not yet made ESG reporting mandatory for listed companies. There are 4,000 listed companies in the A-share market, but less than one-third of them have adopted ESG information disclosure. Moreover, the reports disclosed by these companies were not complete and standardized enough. Many listed companies still conceal, omit, and dilute information about environmental penalties, rectifications, and other problems, which affect investors’ judgment of the company. From the perspective of investors, the research and development of ESG investment strategy in China is still in its infancy, and many institutions still face the dilemma of incomplete information access and insufficient data analysis ability. Many institutions need to rely on the models and algorithms of international institutions for research and investment, and there is a significant gap with international institutions in the overall ESG investment model.

In the context of China’s promotion of financial system reform and continuous intensification of capital market reform, there is a growing need to strengthen the ecological construction of ESG investment. This can promote the reform of the capital market with corporate information disclosure as the main driver. It can also help listed companies to strengthen corporate governance, further improve the efficiency of management, help companies to establish a long-term development strategy, and form a virtuous circle between capital and the real economy.

Relatively speaking, China still lacks a complete ecosystem for ESG investment, and there is a gap between China’s ESG investment and advanced international standards in terms of data, standards, professional capabilities, investment research, investor education, and other aspects. Under this circumstance, Chinese institutional investors will face strong competition from overseas institutions in the field of ESG investment; meanwhile, the Chinese financial market will also face competition from the international market, which has a dominant position in terms of investment rules and standards, etc. This gap may widen the gap between China’s financial market and the international market in terms of resource allocation efficiency as a whole, and make it difficult for China to take the lead and initiative on environmental issues.

Founder of Anbound Think Tank in 1993, Chan Kung is one of China’s renowned experts in information analysis. Most of Chan Kung‘s outstanding academic research activities are in economic information analysis, particularly in the area of public policy.

Wei Hongxu, graduated from the School of Mathematics of Peking University with a Ph.D. in Economics from the University of Birmingham, UK in 2010 and is a researcher at Anbound Consulting, an independent think tank with headquarters in Beijing.


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