The scale of global ESG assets climbed to a record-breaking US$1.26 trillion in the third quarter of 2020; In China, the proportion of ESG mutual funds to the size of overall stocks and hybrid funds reached 2.16%, about 18% of growth than in 2019; Commercial banks have ramped up their ESG wealth investment products from nothing. In 2020, stakeholders have paid unprecedented attention to the ESG field, making "ESG" the buzzword for the financial industry.
On December 1st, 2020, the 8th China Social Investment Forum (China SIF) held the discussion around "the driving force of ESG mainstreaming and market response". At first, four keynote speakers shared their insights and opinions on ESG mainstreaming. They are policy-side representatives Cao Deyun, Executive Vice President and Secretary-General of the Insurance Asset Management Association of China (IAMAC), and Huang Liping, Deputy Secretary General of China Asset Management Association (AMAC); and market-side representatives Matthew Arnold, Managing Directorand Head of Corporate Responsibility Engagement of J.P. Morgan, and Thomas Kwan, Chief Investment Officer of Harvest Global Investments and Head of ESG of Harvest Fund Management.
Cao Deyun emphasized that responsible investment and sustainable finance with ESG investment as the core should become the strategic focus for all institutional investors, including insurance companies. He introduced IAMAC actions to promote ESG concepts and practices, including holding the ESG forum with PRI, and launching the green investment initiative for insurance asset management industry. In the fixed assets investment by insurance funds, the debt investment involving green enterprises reached 494.6 billion RMB. China Life Asset Management Company and Ping An Insurance Group became PRI signatories in 2018 and 2019 respectively. IAMAC also established ESG research groups under the international expert advisory committee and work on specialized reports. In August 2020, IAMAC launched aspecific survey on the green sustainability of insurance institutions. Research shows that most insurance institutions have some understanding of ESG, but it is still limited to some large insurance institutions in terms of ESG practices, strategies, and products.
Cao Deyun, Executive Vice President and Secretary-General of the Insurance Asset Management Association of China (IAMAC)
Huang Liping summarized the three driving forces of ESG investing, including values, risk management and investment return; and shared three key factors regarding how ESG can be further advanced and implemented, that is the ESG evaluation system, the ESG investors, and the ESG investment targets. Huang Liping also introduced the self-assessment of green investment by their members carried out by AMAC. The preliminary results show that mutual funds with larger scale of non-monetary portfolios tend to take a higher proportion in integrating green investment into their corporate strategy. Huang Liping said that AMAC hopes to build an open platform for sharing and exchanging ESG knowledge and experiences, and to promote communications among academia and practitioners, as well as dialogues regulators and the market, creating a favorable environment for ESG development.
Matthew Arnold is a veteran in responsible investment for his 32-year experience in the field. In his dialogue with Dr. Guo Peiyuan, he expressed his affirmation of ESG's integration into the mainstream of financial industry. Currently about 40 trillion US dollars of assets around the world are related to ESG, with an average annual growth rate of 8-10%. For J.P. Morgan, he mentioned that the ESG journey began around 16 years ago, and in the past three or four years, ESG has gone beyond a mere risk factor, and evolved as a commercial consideration. This new trend starts with green bonds, and J.P. Morgan is the world's largest issuer of green bonds and has established a carbon transformation center, aligning its asset portfolio with Paris Agreement. When talking about China's carbon neutrality goal, Matthew said it is particularly important for China as well as for the global economy. He also reminded everyone that China is the first country in the world to establish green guidelines for the banking industry, issuing the "Green Credit Guidelines" in 2012. J.P. Morgan analysts predict that China's solar energy market will double in the next five years, with installation cost similar to that of coal power. In the next 40 years, the energy economy will experience astonishing development. 2021 is the 100th year of J.P. Morgan entering China. In addition to securities, asset management, and futures, J.P. Morgan also actively tracks China-related ESG indexes.
Matthew Arnold, Managing Director and Head of Corporate Responsibility Engagement, J.P. Morgan [ONLINE]
Thomas Kwan told us that Harvest Fund started to build its ESG team in 2017, focusing on building an ESG research framework and evaluation system coherent with investment logic of the Chinese market. The CSI 300 Harvest ESG Leading Index, with Harvest ESG score as the core benchmark in portfolio construction, has achieved an annualized return of 5.1% over the CSI 300 Index since 2016. Thomas Kwan agrees that ESG investing has been recognized as the mainstream of the financial industry globally. In the first half of this year, the global net inflow of ESG funds exceeded US$110 billion, hitting a record high. PwC’s survey report shows that the proportion of ESG integrated European mutual fund assets will rise from 15% in 2019 to 57% in 2025, and the total ESG assets will reach 76 trillion euros, which means that ESG investing will become mainstream in Europe if not now. However, he deems that ESG investing in China still faces challenges. First, there is lack of ESG culture; second, information disclosureis to be improved while the international ESG standards and frameworks are not fully applicable. Last but not least, major domestic asset owners have not put forward ESG-related requirements for their external managers. Thomas Kwan said that there is still a long way to go for ESG investing to get mainstreamed in China. In the future, Harvest will strive to establish a culture for investment stewardship. At this stage, it is hoped that the major domestic and overseas asset owners can include clearly stated ESG requirements in their mandates to asset managers.
Thomas Kwan, Chief Investment Officer, Harvest Global Investments; Head of ESG, Harvest Fund Management [ONLINE]
A wide spectrum of notable guests in the global financial industry participated in the featured roundtable discussion. Luo Nan, Head of Principles for Responsible Investment (PRI) China moderated the panel. Representative from the government - Lin Wei, distinguished expert from the Beijing Municipal Government and Economic Advisor to the District Major of Tongzhou District; representatives from asset owners and asset managers - Miyuki Zeniya, Fellow & Head of Sustainable Finance of Investment Planning Dept. in Dai-ichi Life Insurance Company Limited, and Yu Hua, Former Chairman of Morgan Stanley Huaxin Fund Management Company; as well as the representatives from the indispensable part of the financial market – Ye Min, Managing Director & Head of International at Moody's Corporation, and Helena Fung, Head of Sustainable Investment in FTSE Russell Asia Pacific, attended the panel discussion.
Plenary Roundtable: What Drives ESG into Mainstreaming and Market Response
Miyuki Zeniya elaborated on the three major progress of ESG development in Japan in 2020. The first is the revision of "Japan's Stewardship Code"; the second is the pledge of Japan’s promise in achieving carbon neutrality by 2050; the third is a national action plan on business and human rights was released by the Japanese Ministry of Foreign Affairs in October. Zeniya said that in March, Dai-ichi Life Insurance released a new policy that ESG considerations will be integrated into the 36 trillion JPY asset under management in the next three years. When selecting external managers, Dai-ichi Life Insurance would consider their ESG practices and in the mandating process. As an asset owner, Dai-ichi Life Insurance hopes to address social issues through the promotion of ESG integration, including addressing the climate change challenges, in order to revitalize the Japanese economy and make it more resilient.
Miyuki Zeniya, Fellow & Head of Sustainable Finance, Investment Planning Dept. The Dai-ichi Life Insurance Company Limited [ONLINE]
Yu Hua supported the trend of ESG investment mainstream in overseas markets. especially displayed during the epidemic time of this year. He demonstrated evidence from Morningstar's analyses. In 2018, the net capital of ESG-themed funds in global mutual funds was 5 billion, which has quadrupled to 20 billion in 2019, and has exceeded 10 billion in the first quarter of this year. New investment funds seamlessly enter ESG areas, and from the aspect of investment performance, 70% of ESG-related funds ranked in the top 50% of all funds during the first three quarters of this year, all supporting the trend of ESG mainstream into overall financial markets.
Yu Hua, Former Chairman, Morgan Stanley Huaxin Fund Management Company; Member of China SIF Board of Directors
However, both Luo Nan and Yu Hua believe that ESG has not yet entered the mainstream in China. Yu Hua said that according to the survey results from AMAC, only about 20% of the mutual and private fund managers have taken actions on ESG, while 80% are still lingering around. ESG investing in itself is challenging, given its goal to integrate investment return with environmental and social impact, and that the enhancement of ESG risk-adjusted return can only be observed in the long run. Currently the ESG products in China are still limited in scale, quantity and variety. Another important driver for ESG mainstreaming is the request of LP. Overseas LPs generally require private equity funds to consider ESG, pushing asset managers to establish ESG-related systems and process, which may not happen that quickly in the region in the short term. Yu Hua hopes that Chinese asset owners and asset managers can spend more in engaging with investment targets on climate change issues and to influence their ESG practices. He also expects the evaluation scheme for fund managers could be upgraded to assimilate new dimensions to measure the responsible investment performance in addition to financial returns.
What kind of ESG services that are called for in the financial universe especially from international investors? Ye Min talked about ESG disclosure, including what to report and the reporting standards, indicators and benchmarks, as well as quantification and standardization for comparison purpose. These are the areas that service providers keep exerting efforts on. In the past few years, Moody’s has been conducting research and testing on how to incorporate ESG profiles of issuers into credit rating process, hoping to provide the bond investors with a more comprehensive reasoning ground. Ye Min believes that one fundamental reason why investors and companies increasingly look at ESG, lies in the transition of governance focus, from a simple shareholder benefit model to a multi-stakeholder model. Looking into the future, Ye Min would like to see the quantification of ESG data, and a positive driving mechanism that companies are incentivized by the benefits brought by practicing and improving their ESG performance.
Ye Min, Managing Director - Head of International at Moody's Corporation
Helena Fung updated the audience with the most influential achievements of ESG in Europe among all others, which are the “Action Plan: Financing Sustainable Development” and “EU Taxonomy”. Among six environmental objectives, the European Commission launched a public consultation on the criteria for the two of them: climate change mitigation and climate change adaptation. The criteria are based on the Technical Screening Criteria previously published by the Technical Expert Group (TEG), and conerning dozens of economic activities, stretching from projects, assets to financial products. Financial institutions will abide by the disclosure requirement from 2021 and corporates from 2022. EU sets a minimum standard for the climate benchmarks: EU Climate Transition Benchmarks (EU CTBs) and EU Paris-aligned Benchmarks (EU PABs), as well as necessary sustainability-related disclosures for all benchmarks. FTSE Russell is actively facilitating investors to meet the benchmark requirements, and to ensure transparency in the process. Helena emphasized that it is more important to employ ESG in a way that makes it more solid and credible, getting investors to understand the specific environmental impacts of their investments and respond to climate change. Helena also mentioned corporate governance, including the proportion of women on the board, as well as thematic principles and initiatives emerging around the world, including "Climate Action 100+" (FTSE Russell released a series of themed products), adequate minimum wages, TCFD, etc. Regarding ESG mainstreaming, Helena believes that regulators have recognized the importance of ESG in driving investment in the right direction; in China, it is particularly important to establish a set of globally compatible ESG standards to facilitate investors to make decisions.
Right: Helena Fung, Head of Sustainable Investment, APAC at FTSE Russell [ONLINE]
China is one of the first countries in the world to launch a green finance framework, which is intertwined with ESG. China SIF invited Lin Wei to share on this front, a distinguished expert from the Beijing Municipal Government and Economic Advisor to the District Major of Tongzhou District. Tongzhou is an important administrative for green finance development in China as well as an international green finance center being built. As the sub-center of Beijing city, Tongzhou is equivalent to Beijing's "provincial capital", resembling Shanghai Pudong 20 years ago. In the next 15 years, the scale of investment is estimated to be 3 trillion RMB, among which, 800 billion has been clearly documented in the "14th Five-Year Plan". Tongzhou has attracted a large number of organizations dedicated to green finance, including China Beijing Environmental Exchange, China-U.S. Green Fund, UK China Green Finance Center, Institute of Finance and Sustainability, and Refinitiv – an international financial information service provider. At to the policy, there are both national and municipal & district-level supports including but not limited to corporate set-up and income tax etc. Lin Wei believes that one of the strongest driving factors in the process of ESG mainstreaming in China is its recently declared 2060 carbon neutrality target.
Lin Wei, Economic Advisor to the District Major, Tongzhou District, Beijing, China
In a nutshell, all guest speakers recognize that ESG investing is gradually stepping into the mainstream in one way or another, presenting both challenges and opportunities. Regulators, asset owners, financial institutions, service providers, and enterprises are all bond to contemplate about how to achieve their mission and goals in the context of pursuing global and regional sustainable development. This is also the original idea behind the theme.
*Note：The article is based on the speeches on site, and the content has not been reviewed by the speakers themselves.