Asia’s booming ESG funds will take off if China improves disclosure standards, say asset managers
- Funds managed with strategies linked to companies’ ESG performance doubled in Asia to US$25 billion last year from US$12 billion in 2019, according to JPMorgan
- Engagement by foreign investors has already seen some Chinese firms enhance disclosures, while impending regulatory requirements would improve it further
Environment, social and governance disclosures by mainland China-listed companies have improved but remain short of the needs of international fund managers, who are increasingly pushed by asset owners to embed ESG considerations into investment decisions, according to asset managers.
Engagement by foreign investors has already seen some companies enhance disclosures, while impending regulatory requirements would improve it further, they said.
“There is still an emphasis on the part of many [mainland-listed] companies we speak to … around disclosing to the letter of the regulations,” said David Smith, senior investment director for Asian equities at Aberdeen Standard Investments, which manages over US$600 billion of assets.
“That said, we have had positive engagements through which we have helped companies move beyond the minimum requirements.”
Funds managed with strategies linked to companies’ ESG performance doubled in Asia to US$25 billion last year from US$12 billion in 2019, according to JPMorgan.
“We believe this could quite possibly double again this year, judging by the amount of investor interest and momentum we are seeing,” said Elaine Wu, head of ESG and utilities research in Asia excluding Japan at JPMorgan. ESG funds focusing on the region have outperformed global ESG funds by 2 to 5 percentage points in the past two years, she added.
A survey conducted by Standard Chartered Private Bank early last year on 1,080 affluent investors in Hong Kong, Singapore, the United Arab Emirates and Britain found that 42 per cent were considering investing 5 per cent to 25 per cent of their funds in sustainable investments in the next three years, while 9 per cent were inclined to put 25 per cent or more.
Another survey conducted by BofA Securities of over 100 emerging market investor clients found that almost two thirds said they paid attention to ESG factors but have flexibility on the degree they take them into account when making investment decisions.
Some 21 per cent reported strong adherence to ESG investing guidelines, while six per cent pay little or no attention to ESG.
In the past few years markets in Hong Kong and Singapore have already implemented rules on mandatory annual ESG information disclosure. This has not been the case in the mainland, where changes are afoot.
In 2018, the China Securities and Regulatory Commission (CSRC) revised its governance code for listed firms, paving the way for the roll out of mandatory ESG disclosure rules. The Shanghai and Shenzhen bourses have since been consulting market practitioners on proposed requirements.
Currently, mainland-listed firms are encouraged by the CSRC to voluntarily publish annual sustainability or social responsibility reports. These disclosures focus mostly on environmental sustainability and philanthropic contributions.
Over 1,000 or 27 per cent of these companies issued ESG reports in 2020, with 86 per cent of the largest 300 mainland-listed stocks by market value doing so – up from 49 per cent in 2010, said Felix Lam, head of investment stewardship for Asia-Pacific excluding Japan at JP Morgan Asset Management.
While the availability and quality of governance data stands out and measurable and comparable environmental data are increasingly available, data on social impact is limited and could be enhanced with regulation, Lam said.
However, mainland-listed companies are willing to share additional information when asked by international asset managers.
“In many cases, the answer from them is, ‘we’ve got all that information but we just did not think that it would be interesting for you to read’,” Aberdeen’s Smith said.
Better ESG disclosure would facilitate allocation of more funds to mainland-listed shares, which only have a 4.9 per cent weighting in the MSCI emerging market equity benchmark, Smith said.
It has the potential to be boosted to 24.5 per cent if MSCI raises their inclusion ratio from 20 per cent currently to 100 per cent, he added.