China’s US$1.4 trillion sovereign wealth fund backs ESG investment while resistance hardens in the US
- Some 65 per cent of listed central state-owned enterprises issue ESG reports, twice the disclosure rate for all Shanghai- and Shenzhen-listed companies at end-2023
- Among SOE issuers in the MSCI World Index, a fifth of them received ESG upgrades last year, compared with 13 per cent that were downgraded
In the US, ESG has become a political wedge issue. In China, it’s a national rallying cry.
“Environmental, social responsibility and governance,” according to a promotional documentary running on Chinese state media, is a way of “using the power of corporations to achieve a more beautiful society.”
Spurred by Beijing, state-controlled enterprises are beefing up their voluntary ESG disclosures. Asset managers are introducing new products to appeal to the investing public. And Guo Xiangjun, deputy chief investment officer of China’s US$1.35 trillion sovereign wealth fund, declared at a forum last month that sustainable investing “will prevail.”
Beijing hopes the embrace of ESG will encourage investors at home and abroad. So far, the response has been mixed.
Still, China’s enthusiasm stands in marked contrast to the political attacks on the movement in the US. Many Republican politicians at the state and national levels have campaigned against ESG, and an alliance of about 20 states, led by Florida governor and presumptive presidential candidate Ron DeSantis, says it’s intent on banning ESG investing outright.
In response, money managers have backed away from the term in pitches to conservative states, which have threatened to pull billions from BlackRock in protest of CEO Larry Fink’s support for ESG.
China to set pace on green finance with policy support, ESG awareness: bankers
China is moving in the other direction. Beijing, which has pledged to be carbon neutral by 2060, is trying to cut the country’s coal consumption and ramp up what is already among the world’s largest stock of wind and solar farms.
Many of the country’s biggest companies are falling in line. Some 65 per cent of publicly listed central state-owned enterprises (SOEs) issue ESG reports, twice the disclosure rate for all Shanghai- and Shenzhen-listed companies at the end of 2022, according to Hwabao Securities Co.
All publicly listed central SOEs are expected to disclose ESG information by year end, a representative from the State-Owned Assets Supervision and Administration Commission’s research centre said at the Boao Forum last month.
Some investors seem encouraged by the increased emphasis on ESG and the promise of better disclosures. Since China’s top securities regulator proffered a “valuation system with Chinese characteristics” in a speech in November, an index that tracks the performance of central SOEs has gained 11 per cent, outstripping broader China indexes.
The concept could imply a premium for SOEs that support national goals, which converges with ESG investment principles, said Yang Zhenjian, a fund manager at Bosera Asset Management. Investors should pay attention to SOEs that take up more social responsibility and are market oriented, Yang added.
Lack of disclosure has long been an obstacle for global investors interested in China, and the additional information on ESG will be welcome, Morgan Stanley analysts said in a March research note.
Influential ESG ratings firm MSCI is also seeing improvement. Among the mainland China SOE issuers in the MSCI All-Country World Index, a fifth of them received ESG upgrades last year, compared with 13 per cent that were downgraded.
More disclosures may not be enough for global ESG investors, particularly those whose criteria differ from Beijing’s. Russia’s invasion of Ukraine has made asset managers more aware of the risks of investing in an autocratic country. Even before the war, China’s record on human rights was a disqualifier for many.
MSCI last month red-flagged state-owned PetroChina for links to forced labour in Xinjiang, prompting ESG funds run by foreign asset managers including BlackRock to sell. Beijing has denied the labour allegations.
Dozens of foreign ESG funds recently divested from Tencent Holdings on censorship and regulatory concerns, pulling more than US$1 billion. Chinese banks meanwhile still account for 87 per cent of global coal financing, and may soon be the only backers for the sector, according to Bloomberg Intelligence.
Recent market performance has also proved a headwind. ESG fund performance suffered along with the broader markets last year, and investor appetite waned. Net ESG flows in China plunged 98 per cent in 2022 to US$1.3 billion, according to Morningstar.
Domestic asset managers believe investors will return. China Securities Index Co this month said it would release two new SOE-focused ESG indices, adding to more than 120 ESG-related products across equities, bonds and multi-assets.
Meanwhile, investment firms are keeping up a “steady flow” of ESG fund launches, adding to the existing 140 billion yuan (US$20 billion) mutual fund market as a tactical move even if there has not been a huge uptick in assets, said Harry Handley at Z-Ben Advisors in Shanghai. Alignment with high-level policy goals is likely the key driver, he added.
China is “learning to speak the same regulatory language and ESG is gaining importance worldwide,” said Morningstar analyst Boya Wang.
