ESG progress faster than investors’ expectations, says PRI China country head

The Asset talks with Luo Nan, China country head at The Principles for Responsible Investment (PRI), about China’s embrace of ESG

Luo Nan, China country head, The Principles for Responsible Investment
Luo Nan, China country head, The Principles for Responsible Investment

THE Asset talks with Luo Nan, China country head at The Principles for Responsible Investment (PRI), about China’s embrace of ESG.

Luo explains how China is leading the global charge towards sustainable practice in investment in accordance with environmental, social and governance (ESG) factors. The country faces immense challenges in pushing the ESG programme, but progress has been swift.

What progress has China made towards embracing ESG thinking in recent years?

China is progressing quickly on ESG although it would be fair to say the country is still very much at the early stages of developing that programme. Still, ESG is fast becoming a well-known concept which is drawing stakeholders’ attention across China’s capital markets and investors believe that the process of linking Green with ESG and the capital markets is progressing faster than they expected.

The release in August 2016 of ‘Guidelines for Establishing the Green Financial System’ jointly issued by seven ministries in China as a response to the party’s agenda on ‘Ecological Civilization’ was a big turning point, which is accelerating the pace of the ESG programme in the country.

What are the active elements of that programme?

Regulatory bodies have started to actively promote the ESG concept and its development through international exchanges, training, and developing their own policy and regulatory initiatives. For example, the China Securities Regulatory Commission has set out a timetable which will require all listed companies to mandatorily disclose environmental information by 2020.

Investors – in particular asset managers – have started to research ESG and have actively been learning from their international peers on the topic. They are in the process of establishing their own ESG system which includes indicators which enable them to practice ESG-conscious investment.

In the meantime, there is increased awareness and interest from investors and service providers in relation to the Principles for Responsible Investment and the benefits of membership in relation to ESG-conscious investing. There is also an increasing volume of jobs available in China relating to ESG. Meanwhile a growing number of specifically labelled ESG and Green indices and products will further guide the direction of the programme in China.

A strong commitment from high level authorities in China on Green development, the awakening of public concerns on environmental pollution, the international agenda – including the Paris Agreement – and edicts from the G20, plus requirements from international clients, motivated by benchmarking exercises such as the inclusion of China A shares within the MSCI universe of indices, are key driving forces.

How important is the growth of Green finance in relation to the "E" element of ESG in China?

Green finance is the main driving force of the development of ESG thinking in China. This has greatly raised the need of stakeholders to pay attention to environmental issues including risk and opportunity. However, I think there are differences among the two concepts.

Green finance is designed to constrain impediments to industry – the foremost of which is pollution – and to support the development of “Green aware” industry in order to address environmental problems and facilitate the transition to a sustainable economy.

ESG is best seen as founded in a holistic approach which comprises tools to incorporate critical factors into the investment analysis and decision-making process by investors and companies across industrial sectors. Both support and complement each other for achieving the goal of a sustainable financial and economic system.

Will social and governance issues reach a similar level of prioritization as the environment is in the ESG complex in China in the coming years?

Notable pressure has been exerted in Chinese society on prioritizing ‘E’ at the current stage of China’s development. By contrast, currently I think there’s a lack of awareness, understanding and consensus on the “S” and “G” constituents of ESG. However, the three factors are correlated. For example, environmental issues impact social issues and this will naturally lead to an improvement in S and G to some extent.

Before S and G can become essential elements of the agenda, there’s a pressing need to study and develop narratives and a common understanding of what are the issues and how they should be addressed. Communication to the public and broader education among investors are key to developing the broad ESG programme in China. Evidence on risk and consequent implications for investors need to be much better developed and communicated.

 

For more information about PRI, please see www.unpri.org

Date

24 Jan 2018

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