China's ESG investment Trends and Changes in 2020

ESG Investing Frontier Forum has held 6 sessions since June 2020. The forum mainly focused on 6 topics: the global development trend of ESG investment, concept landing, analysis and evaluation, supervision and self-discipline, modeling and application, and corporate governance.

It introduced domestic and foreign ESG investment practice exploration as cases, and deeply discussed the valuable experience, difficulties and challenges in the practical operation process. A total of 92 organizations participated in those discussions, 26 media reported, and more than 430000 people watched the forum live online.

Compared to the international market, China's ESG investment is still at its early stage, but there is no lack of effort in innovative frontier exploration.

As for funds in China, as of December 16, 2020, 13 public fund companies have joined PRI. Asset management institutions represented by fund companies gradually began to establish their own ESG investment evaluation system and its integrated application in the early, middle and late stages of investment; establish ESG investment research system and ESG database. At the same time, these institutions have gradually launched ESG or sustainable development fund products in the domestic market, such as the CSI Sustainable Development 100 ETF jointly launched by Bosera Fund and China Alliance of Social Value Investment.

In terms of bonds, green bonds still dominate the ESG theme bonds in the market. Representatives from securities companies said that they have began to consider integrating ESG related factors into the original investment system, including asset analysis, interest rate cycle analysis, securities pricing and position tracking. The bond market also has a more special city bond, and how to integrate city bond and ESG evaluation also needs exploration.

In terms of insurance, representatives of the insurance industry attending the meeting believed that the pursuit of safety, liquidity and profitability of insurance capital naturally matched with the characteristics of ESG investment. However, it is difficult to support portfolio construction by ESG alone, and it still needs to be combined with fundamental research.

In terms of financial services, services such as rating, index, data and proxy voting show a trend of professional development. In terms of rating and index, there are not only overseas leading index companies such as MSCI and FTSE Russell, but also local index companies and fund companies involved in this business, as well as third-party evaluation institutions such as Syntao, China Alliance of Social Value Investing, and Green Finance International Research Institute of Central University of Finance and Economics. The underlying data is the cornerstone of ESG evaluation. Professional ESG data service providers continue to emerge in the market. In addition, some technology companies use AI and big data technology to collect and apply alternative data. With the further deepening of the concepts of shareholder activism and due diligence management in the Chinese market, proxy voting institutions began to develop.

In terms of supervision, since 2018, China Securities Regulatory Commission (CSRC), industry associations, exchanges and local governments have promoted ESG investment supervision to varying degrees.

At the local government level, Shenzhen issued their first green finance regulation in China, the “Green Finance Regulation of Shenzhen Special Economic Zone", which requires innovation of green financial products and services, establishment of compulsory liability insurance system for environmental pollution and compulsory disclosure of environmental information.

However, the vigorous development of ESG investment is also accompanied by corresponding challenges. The following four key challenges were repeatedly mentioned at the forum.

First, ESG investment lacks the support of underlying data, the degree of enterprise information disclosure is insufficient, and the disclosure quality and standards are uneven.

Second, there is insufficient motivation for enterprises to implement ESG.

Third, most investors prefer to pursue short-term profits.

Fourth, ESG evaluation standards are diversified, and different evaluation institutions have different evaluation results for the same subject.

So how do we integrate ESG to the mainstream?

First, aiming at the problems of data sources and data quality, some experts suggest to solve this problem in the form of establishing sustainable development data alliance, or establish ESG public information disclosure platform through credible institutions (such as the government) to open up and integrate data sources. The government and relevant regulatory departments can further strengthen the relevant norms and guidelines of information disclosure of enterprises and issuers, and improve the quality of information disclosure.

Second, ESG investment needs the participation of leading long-term investors to play a leading and exemplary role. Long term investors introduce ESG evaluation criteria in the process of selecting asset managers, which will further promote asset managers to consider the weight of ESG in investment decision-making when they construct their portfolios.

Third, promote ESG investment, break isolation, establish links and build a good ecosystem. It includes building a solid financial infrastructure and guiding the participation of different stakeholders. At the same time, ESG investment ecology also needs to be balanced, and different subjects engage in specialized business according to their respective advantages, so as to further promote the ecological division of labor.