China’s Rapid ESG Development Stymied by Lack of Standards, Experts Say
Environmental, social and corporate governance (ESG) investment has been gaining traction in China, but the lack of data disclosure standards and regulatory frameworks still stands in the way of ESG development, experts said in a new white paper on ESG development (link in Chinese).
As ESG investing expands globally, ESG development in China has also been fast-tracked thanks to carbon peaking and carbon neutrality goals announced by President Xi Jinping last year, according to the white paper published last week by think tank Caixin Insight and the China ESG30 Forum it co-founded.
The growth of ESG investment in China is driven by governmental encouragement and global investors flocking to the local capital market. For investors, they could stand to gain more profits and better avoid risk, by investing in firms that are committed and transparent with dealing with ESG issues.
The number of ESG mutual funds in China soared in the first three quarters of 2021, with 48 new products launched, equal to the total of the previous five years, the white paper showed. As of September, the total assets under management in the ESG mutual funds surged to about 250 billion yuan ($39 billion), nearly double the size a year earlier. Some of the funds are invested in the stock market.
The number of Chinese mainland-listed companies publishing ESG or corporate social responsibility (CSR) reports has been growing in recent years. One out of four mainland-listed companies released 2020 annual CSR or ESG reports.
However, the challenges to ESG development in China included a lack of standards for ESG information reporting and evaluation, as well as no official definition for ESG funds, experts said in the white paper.
Wang Dequan, CEO of Governance Solutions Group, a sustainable investment consultancy, said regulators in China should consider both the current conditions in China and globally accepted standards when designing standards for listed companies’ ESG information disclosure and evaluation.
In addition, the white paper pointed out that by mid-November, a total of 77 Chinese institutions have committed as signatories to the Principles for Responsible Investment (PRI), almost 50% higher than the number by the end of 2020. The PRI is a United Nations-backed initiative that lays out the groundwork of principles for incorporating ESG factors into investment.
However, out of all PRI signatories in China, only three are asset owners, whose share is much lower than the global level of over 17%, cautioned Zhang Bohui, a professor at the Chinese University of Hong Kong, Shenzhen. Alongside asset owners, there are 57 asset managers and 17 service providers who are signatories in China.
“Currently, those who provide funds to Chinese institutional investors have gradually become aware of the concept of ESG investment, but their participation in ESG investment is still low, and there is still a big gap compared to the rest of the world,” Zhang said.
The professor said in both PRI signing and the size of relevant assets under management, the ESG investment market in China accounts for a very small percentage of the global market. But ESG investment in China has been growing rapidly over the past two years, and capital market participants have started integrating ESG principles into their investment research process, he said, adding that the ESG market has huge potential despite being in its infancy.
Guo Peiyuan, a co-founder of SynTao Co. Ltd., a Chinese consultancy promoting CSR, said China has made huge progress in setting standards for green bonds, given its most recent list of government-supported green bond projects.
China is also cooperating with international organizations to unify the standards. The “Common Ground Taxonomy – Climate Change Mitigation,” a list of economic activities conducive to fighting climate change jointly recognized by China and the European Union, was published in November, paving the way for sustainable businesses in the two markets to attract more cross-border investment from each other.
Contact reporter Zhang Yukun (firstname.lastname@example.org) and Bertrand Teo (email@example.com)
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