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23 Oct China’s ESG Application in Wealth Management Industry
China’s practices on social responsibility investment
ESG, which stands for environmental, social, and governance, is a long-term growth investment strategy that focuses on the non-financial performance of a company. The core of ESG-themed investment is to explore a sustainable development path that finds a balance between a firm’s commercial value and its responsibility in all aspects of ESG. In 2005, the Shenzhen Stock Exchange published China’s first stock index concerned with the corporate governance of listed companies, namely the CNI Corporate Governance Index. The index is based on four dimensions, including shareholder protection, governance structure, external supervision, and business performance. Later, in 2018, MSCI started including China A-shares into its global stock indexes, prompting global credit rating agencies to rate the ESG performance of Chinese listed companies.
In current China ESG-related investment, according to the 2019 China Sustainable Investment Review published by China Social Investment Forum (China SIF), by the end of 2019, China had an outstanding balance of RMB9.66tr in green loans, RMB48.6bn in pan-ESG mutual funds, whereas the issuances of green bonds amounted to RMB1.62tr.
Since 2008, the number of pan-ESG stock indexes has been increasing steadily in China, roughly by four indexes each year. By the end of October 2019, there were a total of 43 pan-ESG stock indexes published on the Shanghai and Shenzhen Stock Exchange, increasing from a total of 11 in 2010. These included ten ESG-centered indexes, five concentrated on corporate governance, and two focused on green development and low carbon emission.
Regarding returns and volatilities, the performances of ESG-screened indexes are better than the themed indexes that comprise companies whose main business is energy saving, environmental protection, or poverty alleviation. ESG-screened indexes refer to those that take into account environmental, social, and governance factors simultaneously.
Under policy and market-oriented motivations, in 2019, Chinese financial institutions ramped up issuances of ESG-related investment products. By November 2019, 42 mainland financial institutions cumulatively launched 95 ESG-themed mutual funds, of which 15 were issued in 2019. Meanwhile, banking-affiliated wealth management arms are also deploying social responsibility investment efforts. Nevertheless, currently, not all domestic ESG-themed funds have “ESG” in their names, more of them are pan-ESG funds called “sustainable”, “green”, or “social responsibility investment”.
The pandemic has shifted more focus onto ESG due to relatively better index performances
Entering into 2020, given the impacts of the COVID-19 pandemic, investors have been paying more attention to factors other than a company’s profits, such as the sustainability of corporate development, resilience of supply chains, the capability to withstand unforeseen risks, flexible work arrangements to ensure the health and safety of employees, etc. From a global perspective, sustainable investment products have shown better risk-adjusted-performance. For example, Morningstar claimed that 51 out of 57 of its sustainable indexes outperformed their broader market counterparts in 1Q20, whereas MSCI’s 15 out of 17 sustainable indexes performed better.
China 2020 ESG investment trends: more diversified financial institutions and investment products will enter the market
Most recently, Haitong International Asset Management on October 15 launched the Haitong MSCI China A ESG ETF on the HKEX, which tracks MSCI China A ESG Universal Index, marking it as the first ETF listing in Hong Kong that broadly invests in China ESG-themed companies. The issuance of the ESG ETF under Haitong comes amid growing recognition and resources for ESG-related investment, which is partially driven by the pandemic this year.
In the meantime, the global environment for ESG investment has been continually improving. For example, last December, the European Union proposed the transition to a climate-neutral society by 2050, aiming to develop the economy with net-zero greenhouse gas emissions. Moreover, the European Union has approved the allocation of EUR500bn for green stimulus. In China, except for ESG-related mutual funds and ETFs, financial investment products in the field are expected to become more diversified, such as the issuance of ESG-themed quantitative funds and bond funds. Moreover, a wider range of financial institutions will place greater emphasis on social responsibility, including asset management arms of insurance institutions and private equity funds.