ESG and sustainable finance: the latest from China

An overview of discussions at the China SIF 2020 Summer Summit

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On June 30, the China SIF 2020 Summer Summit was held, with speakers sharing their views on ESG investment in the context of Covid-19.

Dr. Jun MA, Chairman of China Green Finance Committee, Member of Central Bank Monetary Policy Committee and Director of the Centre for Finance and Development at Tsinghua University, pointed out that sustainable investment in China in recent years has significantly improved driven by regulatory policies, international collaboration, and positive ESG investment performance. However, compared to European and US markets, ESG products in China market account for a rather small proportion of all asset management products. This is mainly because institutional investors are not sufficiently aware of the ESG concept, and ESG investment tools and data are still somewhat underdeveloped. Dr. Jun MA suggested (1) further enhancing the ESG investment awareness of institutional and individual investors, (2) strengthening the environmental information disclosure of listed companies, bond issuers and financial institutions, and further strengthening the availability and applicability of ESG data, (3) improving ESG data applications and learning to be active shareholders, engaging with investees on ESG issues to exert positive influence. 

Brian Cahill, Managing Director of Global ESG at Moody’s Investors Service analysed the growing ESG influence in the post-pandemic era from the perspective of credit ratings, and pointed out the three major trends brought about by the Covid-19, including: greater focus on institutional preparedness for major identified risks, especially climate change and environmental risks; heightened focus on social risks, including healthcare and social inequality; and broader and deeper awareness of the links between corporate sustainability, reputation and credit risk.

An Evolving Process: Analysis of China A-share ESG Ratings 2020 was launched during the summit. Rui ZHANG, Managing Director of SynTao Green Finance, stated that since 2018, the ESG information disclosure of A-share listed companies has steadily improved, and so the ESG ratings. Over the same period, the level of ESG risk exposure of listed companies has also increased significantly. In the past year, 61.6% of China Securities Index’s 800 constituent companies have incurred ESG controversies. In China A-share market, ESG rating is found positively correlated to stock price performance.

At the end of 2019, the Stock Exchange of Hong Kong released amendments to the ESG Reporting Guide and related listing rules. The amendments took effect on July 1. The Guide emphasises the materiality of ESG disclosure, responds to climate change-related risks and social risks, and introduces relevant mandatory disclosure requirements. Dr. Youwei ZHU, Director of Strategic Research at the Corporate Development Department of Huatai Securities, said the guide had helped Huatai Securities integrate ESG into its investment decision processes.

In a panel on the topic, Robin Hu, Senior Managing Director and Head of Sustainability & Stewardship Group in Temasek International, pointed out that in the first quarter of this year, 66% of shareholders’ proposals were directly related to ESG engagement. In the face of the three biggest challenges of climate change, scarcity of natural resources, and social inequality, companies with poor ESG management will not have an advantage in the risk-reward ratio, and their financing costs will be higher. Dr. Christine CHOW, Director, Head of Asia and Global Emerging Markets Stewardship of Federated Hermes International, brought forward three key points of engagement: first, fund managers and analysts need to know the target company very well, and the target company is willing to communicate on details of the company’s ESG management and performances. Second, identify a champion in the company that could drive institutional changes. Third, respect everyone you communicate with, because they are closely related to the target company's ESG management and are the ones who promote ESG improvement. She suggested that companies and banks should pay more attention to the climate change related risks, consider an exit plan for coal fired power stations and related financing, and gradually transit to renewable energies.

In May, the People's Bank of China, the National Development and Reform Commission and the China Securities Regulatory Commission jointly issued the Green Bond Endorsed Project Catalogue (2020 Edition) for consultation. Huan SHAO, China Programme Manager of Climate Bonds Initiative said the highlight is the exclusion of coal, which is more in line with international practices, while domestically the 2020 Catalogue is better aligned with the NDRC Catalogue in terms of structure. Chaoni HUANG, Executive Director and Head of Sustainable Capital Markets, Global Markets APAC at BNP Paribas pointed out that the current international investors' holding rate of domestic green bonds is only around 2%. The 2020 Catalogue is conducive to reducing the research cost of international investors and reducing their concerns about clean coal. She also said that international sustainable investors not only focus on the green performance at the project level, but also on the overall sustainability performance of the issuer. Improving the ESG performance of the issuer also helps increase international capital inflows. 

Hong YIN, Deputy Head of the Modern Finance Research Institute at Industrial and Commercial Bank of China (ICBC), stated that since the launch of a China-UK Taskforce on Climate-related Financial Disclosures pilot programme at the end of 2017, the number of pilot financial institutions has increased to 13, covering banking, insurance and asset management. In addition, Huzhou as a prefecture-level city has also joined the pilot. The working group has formulated an environmental information disclosure framework, developed an action plan for the pilot work, and issued progress reports for two consecutive years. Chunfeng LAN, Deputy Director in Huzhou Bureau of China Banking and Insurance Regulatory Commission said that Huzhou has formulated a standard template for environmental information disclosure for Financial Institutions, aiming to improve the credibility of disclosure. The local pilot institutions have been increased from the initial four to 19 major banks. There are plans to include insurance companies in the pilot, establishing a green insurance statistical system, innovating green insurance disclosure, and expanding the influence of environmental information disclosure. 

Dr. Peiyuan GUO, Chairman of SynTao Green Finance, suggested strengthening ESG infrastructure, especially ESG information disclosure, data services, evaluation standards, and the cultivation of long-term investors. China SIF will continue to carry out research and facilitate exchanges around the above issues to contribute to the development of China ESG investing.