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The idea that companies’ environmental, social and governance performance should be weighed in investment decisions is beginning to catch on in China. Above, a dead fish floats in water filled with blue-green algae at the East Lake in Wuhan, Hubei province in this August 20, 2012 file photo. Photo: Reuters

China begins to embrace global sustainable investment trend, but big names still missing, says China chief of UN-backed body

  • Mainland companies’ environmental, social and governance performance starting to be weighed in investment decisions
  • But lack of asset owners ‘leaves a major gap to be filled,’ says China’s leader of the drive

Mainland China is slowly embracing the global responsible investment trend, tripling in the past year the number of investment firms agreeing to systematically include companies’ environmental, social and governance performance in their investment decisions.

But a lack of asset owners – such as sovereign fund China Investment Corp (CIC), pension administrator National Council for Social Security Fund and insurance companies – among the signatories to the Principles for Responsible Investment (PRI) means much more work needs to be done, according to its first China head.

“This leaves a major gap to be filled … even as China has seen the fastest growth in signatories globally,” Beijing-based Luo Nan said in an interview.

“But I am excited that CIC has already started research and preparation to build an internal [environment, social and governance performance] investing system, and I can feel an increase in understanding of the investment approach in China’s investment community,” added Luo, who took the job in late 2017 to drive the initiative in the world’s second-largest economy.

Some 21 firms have become signatories of PRI, the world’s leading proponent of responsible investment and a non-profit organisation backed by the United Nations. One year ago, the number was only seven.

But the number remains small relative to the size of China’s economy, considering there were 161 signatories in Asia and 2,232 globally at the end of last year.

The 13-year old PRI is funded by asset owner and professional investor signatories globally with combined assets under management of more than US$80 trillion.

PRI signatories pledge to incorporate responsibility factors into their investment analysis and decision-making processes, demand entities they invest in make disclosures on such issues, and report on their implementation progress. The goal is simple: to encourage companies to engage in behaviours that protect the planet.

The signatories include New York-based BlackRock – the world’s largest asset manager, and Japan’s Government Pension Investment Fund, the world’s largest pension fund administrator.

The 21 mainland signatories comprise some of the nation’s largest private equity firms, such as Jade Invest and Lunar Capital Management, as well as investment firms including Bosera Asset Management, China Southern Asset Management and China Asset Management.

Arjan de Boer, head of Asia markets, investments and structuring at Indosuez Wealth Management, the private banking arm of 124 year-old French financial services giant Credit Agricole Group, said adding such responsibility factors – known by the shorthand ESG – in investing is still novel in Asia.

“In developed markets, especially Europe and North America, this is becoming mainstream and is driven by demand from large asset owners seeking to invest more in firms with strong ESG credentials,” he said.

“This in turn forces companies to make more disclosures … In Asia, there are much less reliable ESG data and ratings available.”

Indosuez taps into resources of sister firm Amundi, Europe’s largest asset manager with 1.48 trillion euros of assets under management, which uses ESG data and ratings from eight external suppliers to give ESG scores on clients’ entire portfolios and individual investments.

De Boer said in mainland China, environment factors get most of the attention while governance ones come as a “good second.” Meanwhile, social aspects are still lagging with board and top management diversity particularly needing improvement, he said.

“We anticipate rapid development in this area despite admittedly from a low base,” De Boer said. “This will be helped by the trend that more Chinese stocks will be included in the MSCI indices [and be invested in by more foreign investors].”

He pointed to the China Securities Regulatory Commission’s recent decision to include mandatory ESG disclosure in its new corporate governance code as an example of improvement.

This is expected to be implemented by the end of next year, based on CSRC officials’ public comments, Luo said.

However, De Boer said while there is political will in China to drive ESG investing forward, the investor base is lacking in diversity to drive demand when compared to Europe.

Meanwhile, in Hong Kong, more banks have begun to develop in-house ESG capabilities including research, to service growing demand from investors, Hong Kong-based non-government organisation Sustainable Finance Initiative noted last month.

“This creates hope that research will eventually translate into financial products,” it said in a statement, adding Hong Kong’s sustainable investment pool of US$13.5 billion in 2016 as estimated by Global Sustainable Investment Alliance amounted to just 0.06 per cent of the global total of US$22.9 trillion.

This article appeared in the South China Morning Post print edition as: China begins to embrace sustainable investments, but big names missing