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Bridging the ESG gap in China

(ATF) Clean energy funds made up 70% of China’s ESG fund assets under management and accounted for over 90% of the net sales collected in 2020. This is largely due to strong outperformance, as ESG – Environmental, Social and Corporate Governance – investing remains primarily retail driven in China. 

China’s nascent ESG fund industry more than tripled in 2020 to hit US$26.4 billion at year-end. Supported by rising demand from investors as well as strong government initiatives, the momentum in ESG investing in China has been rising.

This finding emerged in Broadridge’s latest quarterly China Navigator report, which tracks a total of 87 ESG funds across equity, multi asset and bond segments.

A departure from the multi-prong drivers for ESG investing across the world is key to note for global managers looking to replicate their success in China.

While exponential ESG growth in Europe and the US is driven by a combination of regulatory developments, investors’ awareness and a desire to ‘do the right thing’, outperformance is key in China. It is often achieved by investing in leading companies in new, fast-growing industries, which also tend to have higher ESG scores.

Nonetheless, there is hope that positive coverage of outperformance by top ESG funds and changing demographics will facilitate the adoption of newer and broader ESG concepts in China.

Mutual fund managers are expected to continue their ESG product development around ETFs, quant and fixed income strategies to meet the rising ESG demand across retail, HNWI and institutional client segments.

Mutual fund managers are playing a leading role in ESG investing in China. Benefiting partly from their foreign partner’s global ESG expertise, Sino-foreign JV firms dominate the Chinese ESG landscape. They took nine of the top-10 manager spots, collectively accounting for 61% of the total ESG fund assets as of year-end 2020. For example, Fullgoal, the JV partially owned by Canada’ BMO, topped the leader board, despite seeing its market share diluted by new market entrants.

National priorities critical

Alignment with national policy priorities is critical for designing investment strategies in China. President Xi’s ambitious goals on carbon emissions will be a major catalyst for Chinese companies to actively engage in clean energy and energy conservation.

One recent example is the introduction of China’s infrastructure REITs which will initially focus on environmentally friendly public utility projects, including sewage disposal plants and waste-to-energy electricity facilities.

The lack of reliable ESG data sources and monitoring tools is the key challenge for ESG adoption globally, and even more so in China. Although several local ESG data and rating providers have emerged, it is still a challenge for foreign firms to balance global standards with local nuances.

Market leaders such as Harvest Fund and Ping An have developed proprietary ESG data and rating systems covering China’s A- Share market but coverage on the fixed income space is lagging, as bond issuers in China are not subject to the same ESG disclosure requirements as listed companies.

However, with the help of technology, we expect more innovative ESG approaches, such as natural languages and AI analytics to emerge and build more robust ESG data reporting/rating systems in China.

Beyond the mutual fund industry, Chinese banks’ wealth management subsidiaries have also been playing a fast-growing role in ESG investing. They have initially focused on fixed income ESG products, mainly due to their historical strength in debt investment.

With growing ESG needs in particular from a younger generation of High Net Wealth Individuals, bank wealth management subsidiaries are expected to expand into ESG products across different asset classes, which could potentially provide local and global asset managers with increasing opportunities via MoM, FoF, and other sub-advisory services.

Size and scope matter as ESG investing grows rapidly and competition intensifies in China. It is increasingly critical to have a scalable platform with strong track records, wide product capabilities and multi-channel distribution.

For global managers, it is crucial to define your own playbook for success and adopt flexible approaches with Chinese characteristics – whether it is through leveraging your global investment and ESG expertise in a local context or via active collaborations with the ‘right’ local partners.

#Yoon Ng is Senior Director of APAC Insights at Broadridge Financial Solutions


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