2021 Top 10 Trends in Responsible Investment in China

By SynTao Green Finance 26 March, 2021

China's low carbon transition is in full swing. SynTao Green Finance shares their 10 trends for responsible investment in 2021

This article was originally published on SynTao Green Finance’s website in Dec 2020, you can see the article here.

Despite Covid-19 in the past year, Environmental, Social, and Corporate Governance (ESG) and responsible investment have maintained strong momentum worldwide. Indeed, an increasing number of stakeholders have acknowledged ESG. SynTao Green Finance (STGF) and China Social Investment Forum (China SIF) continue to jointly present 2021 Top 10 Trends in Responsible Investment in China, facilitating market players to shape 2021 strategies.

Trend 1: ESG investment to support green recovery

All economies have been hit — to varying degrees — by the COVID-19 pandemic. However, ESG investment has proven to be one of the few bright spots, with its scale recording new highs in both domestic and overseas markets in 2020. We expect ESG investment to continue to grow even though there are still uncertainties. Green recovery will be an important driver of post-COVID-19 economic growth, where ESG investment will be a key booster.

Particular to environmental areas, 2021 is the first year of the 14^th Five-Year Plan, which states the goal of “making new progress in building an ecological civilization”; 2021 is also the first year after China set the 2060 carbon neutrality target. All these are expected to push capital needs higher as well as create huge investment opportunities in relation to ecological protection and low-carbon transition.

China’s 2030 & 2060 carbon targets create huge investment opportunities…

In social area, COVID-19 has raised public awareness on health issues. Public health and medical services will receive more investment from public and private sectors. ESG investment aims to achieve multiple desired benefits concurrently, aligning economic recovery and sustainable development with financial results, and hence will grab more attention and see more actions.

Trend 2: Financial market to address climate change more proactively

In China, the 2030 peak carbon and 2060 net-zero carbon target has put the low-carbon transition into full swing. We expect that in 2021, green finance will continue to play a proactive role as an important tool to achieve such transition. More climate related financial products will be developed; corporate environmental disclosure especially carbon disclosure will be improved; green financial standards will be further harmonized in order to use similar catalogues to mobilize green loans, green bonds and green funds; incentive and punishment policies and pilot zones will be further enhanced.

…they have also put China’s low carbon transition into full swing

In addition, with respect to international cooperation, it is expected that China will continue to call on financial regulators and financial markets in various countries to collectively address climate change and share China’s experience through multiple platforms such as G20, the Network of Central Banks and Supervisors for Greening the Financial System (NGFS), and the International Platform on Sustainable Finance (IPSF).

Trend 3: National carbon market to be launched officially

After several years of preparation, the national carbon market is already on the horizon in China. In November 2020, the Ministry of Ecology and Environment (MEE) released two documents — Measures for the Administration of National Carbon Emissions Trading (Trial Version) and Measures for the Administration of National Carbon Emissions Registration, Trading and Settlement (Trail Version) — for public consultation, signaling the national carbon market may officially kick off in 2021.

A national carbon market is on the horizon…power gen will be the 1st in the pilot

According to the plan, the first industry to join the pilot will be the power generation. On 29 December 2020, the MEE issued the Implementation Plan for Setting and Allocating the National Carbon Emissions Trading Quota for 2019-2020 (Power Generation Industry). After that, it is expected that more industries will be added to the list, such as petrochemical, chemical raw materials and chemical products, non-metallic mineral products, ferrous metal smelting and rolling processing, non-ferrous metal smelting and rolling processing, paper and paper products, and civil aviation.

Once the national market starts, market expectation on carbon price will become an important factor for pricing assets and making investment strategies. We suggest financial institutions to do pre-research on various scenarios behind the issue. Meanwhile, the Guangzhou Futures Exchange, which is under preparation, is also expected to make a breakthrough in carbon futures product innovation.

Trend 4: Various ESG products to be developed

In 2020, China’s ESG market not only recorded a strong growth but also saw important product innovations. The ESG-themed wealth management service offered by commercial banks and their wealth management subsidiaries, increased from zero to more than 40 in number of products in just two years. We expect that more types of ESG products will come to the market in 2021. Policy support, investors’ increasing recognition, and demand from international mandates stay as the main drivers.

Increasing recognition & demand from international mandates continue to drive the ESG market

Specifically, we expect asset management firms to launch more ESG funds, across active funds, index funds, Smart Beta funds and bond funds. Banks’ ESG-themed wealth management products will continue its rapid growth. Securities firms will also embrace ESG and develop such products as trusts, REITs, and others. The increase of ESG products will be able to satisfy various needs of ESG investors. Meanwhile, ESG investment approaches will also be more diversified. We expect that the leading institutions will further explore stewardship and engagement strategies.

Trend 5: New ESG themes such as blue economy to emerge

We expect that new themes will continue to emerge in the ESG space in 2021. In environmental area, in addition to climate change, the 15^th meeting of the Conference of the Parties (COP 15) of the Convention on Biological Diversity (CBD) will be held in Yunnan, China in 2021, which will certainly raise awareness of financial institutions on biodiversity and natural capital.

BoA & CIB issued 1st blue bonds

In the second half of 2020, Bank of China and China Industrial Bank issued the first blue bonds, and China Industrial Bank and Bank of Qingdao became the first Chinese banks to sign Sustainable Blue Economy Finance Principles hosted by UNEP FI. We expect that more Chinese financial institutions will sign the Principles in 2021 to explore green finance innovation for the blue economy.

In social area, as internet platform economy enters an era of stricter regulation, there will be much higher pressures on issues like fair competition, data security, and privacy protection. This year, the discussion of poverty alleviation will be replaced by rural revitalization.

Trend 6: Domestic asset owners to adopt ESG steadily

In China, two Chinese AOs — Ping An Insurance and Wu Capital — signed the Principles for Responsible Investment (PRI). China Investment Corporation (CIC), the sovereign fund, has launched its ESG investment policy. The Council of Social Security Fund has in its overseas investment manager recruitment policy included responsible investment criteria. China Life Asset Management has applied ESG investment approaches to some of insurance assets. We expect that domestic AOs will continue to steadily adopt ESG in 2021.

There will be more diversified types of AOs that embrace ESG. Among them, we expect that insurance asset management firms and family offices characterized with larger number of institutions and higher flexibility of investment approaches, will be more proactive to adopting ESG. We also expect that AOs would also build ESG capabilities internally, while starting to include ESG in their mandate requirements before they go for full ESG integration. In addition, there would be more exchange and cooperation between domestic and foreign AOs on ESG in the coming future.

Trend 7: How to better use ESG data becomes decisive

Progress was made in ESG disclosure policy in 2020, with the Shenzhen Stock Exchange (SZSE) including ESG in information disclosure evaluation and the Shanghai Stock Exchange (SSE) encouraging STAR Market companies to voluntarily disclose ESG information, though the long-anticipated ESG reporting guide still has yet to be issued. On 29 December 2020, the Reform Plan for Environmental Information Disclosure was approved by the 17^th meeting of the Central Committee for Deepening Overall Reform, which will accelerate policy rollout on corporate environmental disclosure. We expect that there will be a breakthrough in ESG reporting guide in 2021 that will drive high improvement of ESG data both in quantity and quality. Looking forward, better use of ESG data will become crucial, including efficient data collection and processing, in-depth analyses of ESG data, and applying data to ESG product design and stakeholders’ decision-making.

A better use of ESG data will become crucial, including efficient data collection & processing, in-depth analyses of ESG data

In addition, several new trends are also worthy of attention. First, Policy research for bond issuers’ ESG disclosure will continue. Second, 2060 carbon neutrality target will deepen climate-related financial disclosure by financial institutions, and advance the work of China-UK TCFD pilot programme. Third, local governments such as Shenzhen City, will initiate relevant pilot policies.

Trend 8: Harmonized standards to facilitate capital in-flow

The lack of standards or inconsistence of standards is an obstacle to ESG investment. Better harmonization of ESG standards between China and overseas markets, and among different domestic regulatory authorities will greatly facilitate ESG development in China. In July 2020, the People’s Bank of China, the National Development and Reform Commission, and the China Securities Regulatory Commission jointly issued the China “Green Bond Endorsed Project Catalogue (2020 Edition)” (Consultation Paper), heralding the unification of domestic green bond standards and the further convergence of Chinese and foreign green bond standards. We expect that the new Catalogue will be officially issued in 2021, which will significantly enhance the attractiveness of the domestic green bond market to foreign investors.

Harmonization of ESG standards between China & overseas will greatly facilitate ESG in China

In addition, China also proactively participates in international standard settings, including the work of the ISO Technical Committee on Sustainable Finance (ISO/TC322). In December 2020, Yi Gang, Governor of the People’s Bank of China, said that China will proactively promote the convergence of domestic and international green finance standards through revision of domestic standards and international cooperation to facilitate international investors’ participation in China’s green finance market; and that the principle of not compromising the goal of addressing climate change should be followed when improving green finance standards. We expect that all these measures will facilitate capital in-flow from global markets to China.

Trend 9: ESG eco-system to take shape

In the past two or three years, ESG professional service providers in China have grown rapidly. In addition to that, international organizations, business associations, credit rating agencies, fin-tech companies, financial media, and many other types of organizations have also continued to increase their attentions and investments in ESG services and shaped an ecosystem for ESG in China together with asset owners, asset managements, corporations and regulators.

We expect that ESG services in China will enter a new phase of rapid development in 2021. Besides traditional financial service institutions that will continue to invest in this field, mainstream venture capital funds and private equity funds will also pay more attention to ESG and make some investment cases. At present, the industry of ESG service providers has preliminarily taken shape. With ESG mainstreaming and more capital rushing in, it is expected that China’s industry of ESG service providers will be marked by diversification, multi-level competition, and multi-dimensional innovation.

Trend 10: Academic interest in ESG research to increase

There has been an increasing academic interest in ESG research. Many famous universities in China have established research institutes dedicated to green finance and ESG, including, for example, Research Center for Green Finance Development at Tsinghua University, Center for Eco-Finance Studies at Renmin University of China, International Institute of Green Finance at Central University of Finance and Economics, ESG Institute at Capital University of Economics and Business, and Green Finance and Sustainable Development Research Center at University of International Business and Economics. Scholars from Shanghai Advanced Institute of Finance at Shanghai Jiao Tong University, Chinese University of Hong Kong (Shenzhen), Shenzhen Finance Institute, Harbin Institute of Technology (Shenzhen) School of Economics and Management, Shanghai University of Finance & Economics, Nanjing Forestry University, and Shenzhen University have also been actively engaged in ESG research.

Academic institutions will do more ESG related research

We expect that academic institutions will invest more resources in ESG related research. There will be more scholars doing ESG research, more professors supervising students in ESG studies, and more ESG courses at universities. Consequently, we will see more dissertations and research articles on ESG-related theories and practices coming out in near future.

Further reading

• Top 10 Responsible Investment Trends In China In 2020 – With their finger on the pulse, SynTao Green Finance runs through 10 key trends on responsible investing in China in 2020
• ESG Doomsday Preppers – Many laughed at Doomsday preppers but who is laughing now as companies integrating ESG outperform during the crisis? ADMCF’s Alison Lee explores why this is & the future direction
• The Future Of Finance – HKGFA’s Dr. Ma Jun believes in post-COVID times, investors & bankers should expect more emphasis on environmental disclosure by regulators, which will pave the way for higher quality green finance productsClimate Fight: Finance As Asia’s Most Effective Weapon – Green finance is set to take off as regulations promote carbon pricing and better disclosure but Dr Ma and Huang also see gaps that need closing like integrating ESG factors in risk management
• Where Is The E In ESG Disclosure In China? – China is moving to mandatory environmental disclosure with a tentative 2020 deadline, but where are listco’s now? China Water Risk’s Dawn McGregor & SynTao’s Dr. Peiyuan Guo share 8 key takeaways from their newly released joint report, “CHINA PRIORITISES ENVIRONMENT: More Disclosure Needed To Match Rising Risks”
• Connecting Finance & Water Risk – Natural Capital Coalition’s Mark Gough & Joseph Harris-Confino on their newly launched supplement for the finance sector – see how can this help bankers, investors and insurers alike amidst increasing ESG adoption

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