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Climate Change and ESG Investing - Risks and Opportunities
2020-12-17

China’s official announcement that it aims to peak its carbon dioxide emissions by 2030 and achieve carbon neutrality by 2060 has attracted widespread attention and reflects its ambition to make greater contributions to the global campaign against climate change. The Bank for International Settlement (BIS) refers to climate change-related risks as the "green swan" risks, arguing that they could trigger a systematic financial crisis. While addressing and adapting to climate change would create abundant investment opportunities for green transformation. The scale of green investment is estimated to reach tens of trillions of dollars. China's “14th Five-Year Plan” released this year, is said to formulate specialized plans to combat climate change. Given climate change is recognized as a material environmental, social and governance (ESG) issue, there are reasons to believe that the systematic integration of ESG considerations in investing process would become a norm going forward.


At the 8th China SIF Annual Conference held on Dec.1, Guo Peiyuan, Chairman of the China SIF and Chairman of SynTao Green Finance moderated the discussion around "Climate Change and ESG Investing". Speakers representing multiple stakeholders shared their practices and observations.

Plenary Roundtable 2: Climate Change and ESG Investing – Risks and Opportunities

According to Rebecca Mikula-Wright, Executive Director of Asia Investor Group on Climate Change (AIGCC), investors are developing a deeper understanding of climate change and actively responding to climate change in a number of ways, including integrating climate analysis into their investment strategies, engaging with corporates (e.g. "Climate Action 100+"), communicating with regional regulators and policymakers, disclosing climate change-related information, etc. While Task Force on Climate-Related Financial Disclosures (TCFD) becomes the internationally recognized framework, regulators are working on localized principles and guidelines. This year, 14 new members joined AIGCC, reaching a total of 50 members in Asia. AIGCC provides a platform for experience sharing, develops tools applying climate change factors into portfolios, and works on capacity-building scheme, including thematic training around climate change. 

Yin Hong, Deputy Head of the Modern Finance Research Institute at Industrial and Commercial Bank of China (ICBC), introduced the integration practices of climate factors from the perspective of financial institutions. At the strategic level, ICBC works with multiple stakeholders to advance climate change mitigation efforts. At the business level, ICBC integrates environmental and climatic factors into its credit rating and decision-making processes, conducts corporate ESG ratings and ESG information disclosure. In addition, ICBC is actively participating in international cooperation by signing initiatives such as the Principles of Responsible Banking (PRB). Among them, Yin Hong highlighted the progress of the working group on Disclosure of Climate and Environmental Information of Chinese and British Financial Institutions. The working group formulated pilot programs and road maps under the TCFD framework and China's national conditions. At present, the number of pilot institutions has been expanded from 6 to 15 and corresponding information disclosure has been carried out as planned. On the basis of the pilot practices and results, the Guidelines for Financial Institution Environmental Information Disclosure developed by the working group, have entered the review and release stage.

Amar Gill, Head of BlackRock Investment Stewardship APAC, introduced BlackRock's climate change-related policies which takes a top-down approach and emphasized that ESG be the focus of all portfolios. Companies actively addressing the climate change issues will have lower cost of capital and higher market capitalization. Asset allocation in BlackRock is green-oriented, investing in listed companies that take climate change into their decision-making process and divesting from companies that generate more than 25% of their revenues from the coal industry. Meanwhile, BlackRock actively carries out investment stewardship, communicates with listed companies regarding ESG issues, exercises its voting rights to ensure that companies pay attention to climate change, and urges companies to disclose carbon emissions and other ESG information. Amar argues that companies are waiting for policies and regulatory frameworks, and that for many listed companies, they don’t have a plan. During the engagement process, BlackRock expects to gain a better understanding of what the board and executives are thinking and what actions they may take. 

Founder and CEO of 427, a Fin-tech company focusing on climate risk, Emilie Mazzacurati, indicated that higher-quality corporate information disclosure helps improve the accuracy of climate risk assessments and introduced how 427 climate models and climate data can help investors. The model explains how temperature, precipitation, and other climate indicators change over time. Which regions have assets at risk? What loans or assets are at risk from severe extreme precipitation and forest fires? How will the current exposure to assets change in the future? These data can help investors understand climate risks of different types as well as at different points in time, then apply them to different portfolios. Climate risks at the country level could also be identified. Emilie mentioned that one key thing in getting businesses and investors to incorporate climate risks into decision-making processes is to ensure data transparency.

Remote Speakers

Dr. An Guojun, Vice Secretary General of Green Finance Committee and Vice Chairman of China SIF, pointed out that the long-term development of China's climate-friendly funds depends on the establishment of project and asset evaluation system as well as green technology standards, in addition to the improvement of information disclosure, environmental impact assessment and guarantee mechanism. She believed that the climate funds should be multi-dimensional, both at national and local levels. In Aug. 2020, “Green Fund 50” is launched, convening efforts from governments, markets, investors and international institutions. In July 2020, China set up an RMB 88.5 billion green fund to promote green investment in the Yangtze River Delta region. Dr. An Guojun hopes that the climate funds can be effectively linked with the development of low-carbon green cities. The issues mentioned above and how to use capital to drive the development of green and low-carbon technologies are described in more details in two books, "Establishing a Financial Services System that Supports Green Technology Innovation" (构建支持绿色技术创新的金融服务体系) and "For Lucid Waters and Green Mountains – A Journey on Financial Innovation" (为了绿水青山金融破茧之旅).

Sabrina Zhang, China Country Director at CDP, said both the corporate and investment communities  are increasingly concerned about climate risks. Globally, the number of companies that are concerned about climate-related risks rose by about 27%, matching about 80% of the top 500 companies, and 75% of the Standard and Poor's index. Among these companies, 53% identified climate-related risks and opportunities. Overall, participation by Chinese businesses rose by 53%, with 56% that said to have identified opportunities. CDP surveyed the world's most valuable companies, 225 of which identified economic impacts from the climate, potentically with a total economic value of about $2.5 trillion. From the investment side, more investors are considering various ESG integration strategies to optimize their portfolios. The specific strategy employed is related to the preferences of investors. The performance is highly promising overall speaking. 

As for the risks and opportunities posed by climate change, several keynote speakers also made excellent points in addition to those from the round-table discussion guests mentioned above. 

Wang Zhongmin, Former Vice Chairman of National Council for Social Security Fund and the Honorary Chairman of China SIF, took the rise of alternative-energy vehicles as an example, extending from products to the value chain in the sector, including battery recycling and so on, leading to the conclusion that every industry will be impacted by climate change at some level in the future. ESG investment will connect the interests from all-around including industrial, social, personal and capital universe. As a result, he predicted that investors in both the primary and secondary markets would be actively engaged in ESG investing. 

Wang Zhongmin, Former Vice Chairman of National Council for Social Security Fund; Honorary Chairman of China SIF

Dr. Wang Shourong, Former Deputy Director of China Meteorological Administration, introduced the causes of climate change and its disastrous consequences from a meteorological professional point of view. The primary contributor to climate change is anthropogenic carbon emissions. The rate of warming in China is almost twice the global average while the trend of precipitation change is highly uneven across regions. Extreme weather events tend to be more frequent and more intense. Meteorological disasters accounted for 71% of natural disasters, but took a relatively declining share of GDP, averaging 1.82%. He also spoke of the risks of surface water resources and the widespread concerns about air quality and smog. He believes that the current focus of addressing climate change is to strengthen the research on monitoring and scientific mechanism of climate change, reinforce the protection and restoration of the ecological environment, integrate climate environment assessment into economic and social development, and improve climate feasibility study during project selection.

Dr. Wang Shourong, Former Deputy Director of China Meteorological Administration

Dr. Ma Jun, Chairman of China Green Finance Committee, illustrated the implications of carbon neutrality to the financial industry. From the perspective of financial institutions and financial industry, how to improve the green finance system and support carbon neutrality? According to research data, to achieve carbon neutrality goal, there will be a demand for 18 billion new green low-carbon investments over the next 30 years or so, and there is likely to be even higher estimates of low-carbon investment needs in the future. Speaking of sectors, he thinks that energy, transportation, construction and general industry will generate significant demand for green investment Other sectors include forestry etc. Financial products that can support the carbon neutrality goal, includes loans, bonds and derivatives related to sustainability in the US and Europe. Here, the definition of "sustainability" should be defined in terms of carbon, such as carbon intensity, carbon footprint, etc. At the same time, the carbon market should play a greater role in attracting more financial institutions to participate. A catalyst could be opening-up and establishing mechanisms to facilitate the participation of global investors in China's carbon market. In the area of environmental and climate information disclosure, more carbon-related indicators should be included in mandatory requirements. China's financial institutions should strengthen capacity-building in environmental and climate risks. This year, the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) released two reports containing comprehensive approaches of environmental risk analysis, whose users are mainly concentrated in European countries. There were some attempts made by Chinese institutions, hoping for more to learn and apply.

Dr. Ma Jun, Chairman of China Green Finance Committee

Wu Zengtao, Chief Marketing Officer of China Southern Asset Management, emphasized the impact of climate change risks on portfolio and the stability of the global financial system from the perspective of financial institutions. China Southern Asset Management has been promoting the assessment of physical and transitional risks faced by listed companies in the light of the TCFD framework, and the analysis of portfolio risks under different scenarios. This July, China Southern Asset Management formally signed the Climate Action 100+ initiative, which aims to engage with the world’s largest corporate greenhouse gas emitters, in total of 161 listed companies to take the necessary actions to curb emissions, develop action plans and improve the quality of corporate governance and information disclosure. In terms of specific ESG investment practices, in line with the principles of internationalization, characterization and differentiation, China Southern Asset Management keeps exerting efforts in localization of ESG practices, including the structural support, where the general manager serves as the leader of ESG committee, and the respective executives in charge of applying ESG in business lines of equity, fixed income, product and risk management; enhancing integration of ESG into investment research, establishing ESG data sharing platform between research analysts and fund managers, urging fund managers to take into account ESG-related information in investment decisions; implementing the active shareholder strategy, raising awareness and attention of the management of listed companies to ESG related issues in daily operation; establishing a multi-layer ESG product system; continuing to build a leading ESG brand,  promoting ESG concept, advocating the actual practice of ESG investment.

Wu Zengtao, Chief Marketing Officer, China Southern Asset Management

According to “The Global Risks Report 2020” by the World Economic Forum, extreme weather events are among the top 10 risks, both for the greatest probability and the greatest impact. Climate change will have far-reaching and wide-ranging effects on economy, social activities, policies and technology. From the perspective of capital market, taking climate assessment into account is a change that must be proactively addressed. Financial institutions not only need to raise awareness, but also need to make strategies and align the organizational structure, business process, customer communication, product strategy, and information disclosure to well-manage the risks posed by climate change and seize the opportunities.

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