Some of China’s green projects are “cleaner than others”, says former UN climate change chief

China’s rise in four short years from being a marginal issuer of green bonds to hosting the world’s largest market is a sign that it has the potential to become a leader in the wider arena of sustainable investment. But it has some catching up to do first.

That’s according to the United Nations’ former head of climate change, Christiana Figueres, who acknowledged there are still hurdles to be overcome, such as a lack of clarity over what actually constitutes a “green”, or environmentally friendly, investment.

Although it has lagged behind, the sheer size of Asia’s population and its vast economic growth potential means it can eventually catch up with the West in becoming one of the most important markets for responsible investment, said Figueres.

“I would argue that the time lag in Asia would be made up for by scale. Yes, Asia was late to the topic but it will definitely take the lead,” she said. “China alone can lead the world on this, but I don’t think China is going to be the only one.”

Thanks to jumbo offerings by financial institutions, China led the pack in the first nine months of this year, accounting for 44 per cent of the world’s US$63 billion issuances of bonds that fund energy efficiency improvement and environmental protection projects, according to Moody’s. The credit ratings agency projected the full-year global total to reach US$80 billion - nearly double last year’s.

Despite her optimism about China’s future in sustainable investment, Figueres, the former executive secretary of the UN Framework Convention on Climate Change, acknowledged controversy over the “greenness” of some of the projects underway in China.

One area of contention is the fact that Beijing allows green bond proceeds to be used for “cleaner coal” projects. This has drawn the ire of purists, who believe the bonds should not be used to fund coal projects at all.

Figueres argued that green bonds should not be viewed as a “black or white” asset class, as they cover a whole spectrum of projects.

“Some projects are cleaner than others, which is quite understandable,” she said. “Each investor will have to make their own decision, not only on the asset underlying the green bond, but rather the need to balance the [risk and reward] of the green bond with the rest of the investment portfolio.”

Sustainable investment refers to the incorporation of factors including a company’s performance on environmental impact, social responsibilities, and corporate governance (ESG) into the investment decision process.

Figueres, who stepped down from her UN post in July after a second term and recently dropped out of the race to succeed Ban Ki-moon as the organisation’s chief, said younger decision makers are more attuned to the sustainable investment trend.

“The new generation coming into the finance sector either professionally or [from a need to manage family fortunes] have very different expectations,” she said. “They are more serious about responsible investing...as the emergence of international and national policies coupled with the development technology now allow the finance sector to move into these assets without compromising profit.”

Figueres, who has been enlisted by Swiss asset manager Lombard Odier to raise its profile among Asian investors, was speaking to the South China Morning Post before addressing clients at a private function last week.

What is green? Green bond investors in China need an answer

Patrick Odier, a managing partner of the 220-year old Geneva-based asset manager, said the concept of sustainable and responsible investment has moved from “a professional domain to a mainstream domain” in recent years, especially with a younger generation of decision makers involved in asset allocation.

The seventh-generation leader of the Swiss firm said ESG investing has come a long way since he first demanded that all investment recommendations issued by its analysts incorporate sustainability considerations. He said it’s well known that firms that score high on ESG also see their share price perform better.

“I remember vividly the first talk I had personally to some of the heads of big multinationals when ESG investing was starting in the 1990s, the reaction was only mildly positive, to say the most. To think that private bankers such as Lombard Odier would have any lesson to give to industries about [how they should run] their production [in a responsible way].”

Ten years later, he said, some of those firms became leaders in publishing their ESG performance.

Figueres said the new generation of financiers were more aware of the risks facing businesses, including potential fines from environmental damage, legal liabilities and value loss in companies “stranded” in carbon-intensive industries.

Potential legal liabilities were highlighted by a landmark court decision earlier this year ordering the Dutch government to cut the nation’s carbon emissions by at least 25 per cent within five years.

Three judges ruled in favour of a group of activists’ petition that the government’s plans to cut emissions by just 14 to 17 per cent from 1990 levels by 2020 were unlawful, in light of the threat posed by climate change.

US-based energy giant ExxonMobil, the world’s most valuable oil and gas firm, was dragged into a legal action by a group of climate scientists and environmental lawyers last year, who opened investigations into the firm for allegedly misleading the public about climate change risks.

As sustainable investment based on ESG factors gains popularity, investors have become more demanding in terms of the quality of information and research.

“Even 25 years ago, there was research showing that companies or investors that would look at environmental and social issues as part of business decision-making did well economically and their share prices are positively correlated to this,” said Michael Jantzi, chief executive of Amsterdam-headquartered Sustainalytics, the world’s largest provider of ESG-focused investment research.

“But the world is awash with information, we need to turn data and information into insights useful to investment decision making.”

He said there was a sudden spurt in demand for ESG research in western nations 10 years ago, with the formation of the Principles for Responsible Investment, a non-government organisation supported by the UN that promotes responsible investment.

The number of signatories, mainly asset owners and managers, to its six principles that demand they incorporate ESG issues into their asset allocation decision-making, has grown from 19 in the first year to over 1,500, which together manage some US$62 trillion of assets.

In Asia, Jantzi said Japan, the world’s third largest pension market by assets, is leading the trend in responsible investment and greater transparency, thanks to favourable government policies aimed at bringing back foreign investors fed up with low dividend payouts and weak corporate governance and compliance.

It led to the birth of Japan’s first corporate governance code in 2015, a year after the establishment of a stewardship code which has some 213 institutional investors as signatories.

Although the codes focus on corporate governance, Jantzi said: “The conversation often starts with governance, which opens the door to environmental and social conversations.”

And leadership from within a market’s domestic asset owners and managers is key to success in growing ESG investment, he said, adding that Japan’s Government Pension Investment Fund, which has set up an ESG department, has played that role.

“For a market to see growth in this area, you need leadership and engagement from within the capital market, such as pension funds. It cannot be forced upon them,” he added.