How China is working to solidify its place in sustainable finance

Chinese regulators and investors are beginning to step up on ESG, particularly by taking more concrete action on climate and environmental issues. 

While it is notable that the social component of ESG remains a major challenge in China – for example, there is growing investor concern surrounding the alleged abuse of Uyghur Muslims in the Xinjiang region – on the environmental side, China is making efforts to align with international and regional initiatives such as the EU Taxonomy.

Part of this is likely a response to increasing engagement by international investors but, as RI recently reported, the growing number of domestic investors engaging with companies through for example CA100+ is expected to help translate climate pledges to meaningful progress.

Crucially, President Xi Jinping pledged the nation would reach climate neutrality by 2060 at the end of last year. This declaration “will have the most far-reaching impact on ESG development,” believes Grace Guan, Secretary General at the China Social Investment Forum and Deputy General Manager at SynTao Green Finance. 

It is also expected to translate into huge investments – China could spend close to $16trn on clean technology and infrastructure to achieve its Net Zero goal, according to Goldman Sachs. 

‘In the last five years alone eight different types of ESG data and ratings providers have emerged in China’

The country’s 14th Five Year Plan, published in March, provided more detail on the climate neutrality goal. It states China will reduce its emissions intensity – the amount of CO2 produced per unit of GDP – by 18% over the period 2021 to 2025 and non-fossil fuel energy is targeted to make up 20% of its energy mix. 

The plan received mixed responses, with Swithin Lui, Climate Policy Analyst at NewClimate Institute, saying the plan is “underwhelming and shows little sign of a concerted switch away from a future coal lock-in.”

But Rebecca Mikula-Wright, Executive Director at Asia Investor Group on Climate Change (AIGCC), is more optimistic. “While the environmental targets outlined in the 14th Five Year Plan are modest, China has under-committed and over-delivered in its past five-year plans,” she says, adding that following up the implementation of these policy signals with companies will be a key component of Climate Action 100+’s engagement this year. 

And, on 7 June, the AIGCC announced its new engagement programme – backed by institutional investors with more than $8.8trn in assets under management – to drive net-zero emissions transitions in Asian electric utilities. China Resource Power Holdings is one of the five utilities selected for engagement under the initiative. 

To improve and harmonise engagement in the country, Guan explains in addition to supporting international efforts such as the PRI, UNEP FI and AIGCC, China SIF has built a responsible investing network to help connect domestic and international stakeholders. “There is a great asymmetry of information between the domestic corporates and overseas investors,” she says. “So we are using the network to convene all the stakeholders together [so that] overseas investors will know what is going on here in China, and the domestic institutions will know what the overseas investors are looking at.”

There are also signs that China wants to have a more active role in global efforts on sustainable finance and align with international norms on climate-related investing. China is co-convening the International Standards Organisation’s efforts on creating a standard on sustainable finance. Likewise, the People’s Bank of China (PBOC), the Chinese central bank, and the US Treasury have been appointed co-chairs of a G20 committee on sustainable finance which has been newly reestablished after being left defunct for the past two years.

China and the EU are also overseeing an international taskforce on sustainable finance taxonomies, which aims to set out a “common ground” taxonomy this summer.

And in perhaps the most concrete step towards aligning with the EU on sustainable investing, the PBC has made an important clarification to its ‘green catalogue’, which sets out what types of projects qualify for green bonds. The recent update, due to come into effect in July, makes clear that ‘clean’ coal will no longer be included in the catalogue – in late March, Yi Gang, Governor of the PBOC, said at the Roundtable of China Development Forum said it was “removing fossil fuel projects”. These projects are also excluded from the EU Taxonomy and, in the draft released last year a stated objective was to take “mainstream international green finance taxonomy into consideration and continuously improve internationalisation of the Catalogue.” 

‘Everybody talks about the Paris Agreement for climate and it would be a wonderful achievement for China to make sure a Kunming Agreement has a similar ring to it’ – Christoph Nedopil Wang, Founding Director, Green Belt and Road Initiative Center

Green bonds are an important part of China’s green finance market, which according to figures from Syntao Green Finance stands at around ¥13.71trn (€1.75trn). For years, China has dominated the league tables for national green bond issuance, and in January the Bank of China, via its Hong Kong branch, made history by issuing climate transition bonds – the first ever that claimed to be in accordance with the new ICMA Climate Transition Finance Handbook. However, some have questioned the credibility of the bond.

In another fixed income-related first, this month a Chinese ESG bond index was launched and will be made available to international investors through the Luxembourg Stock Exchange.

However, recent research by prominent think-tank the Institute for Energy Economics and Financial Analysis (IEEFA), alleged investors in green bonds issued by Chinese utilities may be “inadvertently” funding fossil fuels due to loopholes in the rules which govern the bonds’ use-of-proceeds.

Chinese regulators are also following the lead of several other governments in considering imposing mandatory ESG disclosures for listed companies. At the China Development Forum, Gang said the PBOC is planning to develop a mandatory disclosure system on climate-related risks, and is also looking at the possibility of including climate change factors in the stress test of financial institutions and deepening international cooperation.

While voluntary disclosure is improving – disclosure rates among the 300 largest companies listed on the Chinese Securities Index (CSI) climbed to 85% in 2019 from 54% in 2013 – there are still gaps and inconsistencies in reporting. 

“Companies are confused about what to disclose because of various guidelines’ differing requirements – CSI 300 companies already follow a total of nine guidelines,” writes Jessica Tan, Co-Chief Executive Officer and Executive Director, Ping An Insurance (Group) Company of China. “Companies also have to respond to different rating providers, which diverge significantly in their frameworks.” 

SynTao Green Finance found discrepancies in what is disclosed by CSI 300 constituents. For example, more than 90% of constituents reported on environmental management objectives and anti-corruption and bribery, while fewer than 10% disclosed sustainable development commitments.

Meanwhile, the number of ESG indices doubled in China last year, according to the Ping An Digital Economic Research Center. Its Deputy Director Chenxi Yu says greenwashing is a key concern amid a rapid roll-out of ESG products. To help combat this, the Center is, for example, developing natural language processing (NLP)-based transparency indicators that can be used when researching and assessing companies’ performance on ESG.

In tandem with disclosure, improving the availability, quality and consistency of ESG data is also a priority for national regulators and investors. In the last five years alone eight different types of ESG data and ratings providers have emerged in China, but a lack of data is consistently labelled as one of the top three barriers to practicing ESG in surveys. 

“Right now, not many providers cover the entire A shares market, [but] we expect this to improve in 2021,” says Yu. She believes ESG  data in China has “remained to be very much an equity-oriented conversation due to data limitations for fixed income”.

Ping An is expanding its ESG framework to include fixed income ESG data. It has also partnered with information and analytics provider FactSet to provide ESG metrics for Chinese companies. FactSet will work with Ping An’s subsidiary, OneConnect, to incorporate AI-based ESG data, climate risk evaluations assessments and portfolio-level sustainability performance. 

And while data developments are needed, Guan says “the absence of a non-financial data reporting system does not mean there is no data. It does take some time to locate the data as they are scattered in different agencies and specialised databases”.  

Meanwhile, China will be put firmly on the map of responsible investors when the nation hosts COP15 on biodiversity – which, after much delay, is expected to take place in October in Kunming. “China can use its experience with green finance in creating new financial innovative products to play a leading role at the nexus of biodiversity and finance,” said Deborah Lehr, Vice Chairman and Executive Director of Paulson Institute at a recent Finance For Biodiversity Initiative webinar. 

Likewise, in the webinar Christoph Nedopil Wang, Founding Director of the Green Belt and Road Initiative Center, said: “Everybody talks about the Paris Agreement for climate and it would be a wonderful achievement for China to make sure a Kunming Agreement has a similar ring to it.”