A green wave of ESG is poised to break over China

2020 marks a watershed year for the global economy. The case for a heightened focus on environmental, social and governance (ESG) concerns has been clearly laid out both by business leaders and other experts.

It will likely fuel a wave of responsible investment that is already becoming a mainstream phenomenon in global capital markets – and is increasingly so in China. Driven by greater investor demand and stricter regulatory requirements, ESG awareness, monitoring and disclosure in China are bound to accelerate.

A few years ago, it was hard to make ESG-themed investments in China because there was insufficient data to assess companies’ ESG performance. However, that is rapidly changing. In 2019, 85% of CSI 300 companies released official ESG disclosures, a rapid growth from 54% in 2013. However, among the companies that disclosed, only 12% had audited reports, suggesting ample room for improving the quality of disclosures.

The trend of increasing ESG disclosures in China is driven by a few forces. In terms of regulation, Chinese regulators had set a goal for mandatory disclosures for listed companies by the end of 2020, now expected to be 2021 due to the pandemic. In addition, President Xi has announced China’s goal to be carbon-neutral by 2060, which will further fuel the transition to low-carbon economy transition. In terms of investor demand, foreign investors who invest in Chinese assets have to meet their fund domicile standards on ESG when investing in China, driving improved reporting by Chinese firms.

Such forces have led to higher disclosure rates and also a plethora of third-party rating and data providers. Over a period of five years, the number of providers increased from zero to eight in China. Also, the type of providers is more diverse in China. While the global landscape consists of established financial data providers and a recent wave of fintech companies, Chinese providers range from traditional index/data providers, fintech companies, asset managers/owners and academic/non-profit institutions to consulting companies. The diversity of providers could be a positive force in terms of enriching the market with more data sources and viewpoints.

It is only with comprehensive ESG data that we can create the necessary ingredients to develop ESG-themed financial products such as indices and funds. Indeed, there has been a spur of such products available to investors in China. Out of the 19 indices constructed based on comprehensive ESG scores, half were released in 2020. Similarly, total asset under management for ESG-themed funds in China grew by 50% this year compared to 2019.

Although there has been exponential growth in ESG adoption and awareness in China, gaps still exist both for companies trying to improve ESG performance and investors trying to integrate ESG into their investment processes.

To further propel ESG development in China, we need a concerted effort from regulators, companies, data providers and investors to strive for more unified requirements, higher-quality data, and more investment options.

Going forward, we expect comprehensive disclosures from a broader set of companies and more alternative ESG data signals, which will enable increasing diversity in financial products that help channel capital towards sustainable development and transition into a low-carbon economy.