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Bridging the ESG gap in China

Key takeaways

  • Chinese ESG fund assets have more than tripled in 2020 to reach US$26.4bn, with clean energy making up 70% of total AUM.
  • Global managers looking to replicate their ESG success in China need to note that performance is the dominant driver for adoption, unlike the more multi-faceted and nuanced drivers seen in Europe and the US.
  • China’s ambition to curb carbon emissions will be a key driver, as aligning investment themes to the government’s agenda is a critical success factor.
  • Market leaders in China are building proprietary tools to circumvent the lack of credible data sources and monitoring tools; expect natural languages and AI analytics to emerge and build more robust ESG data reporting and rating systems over time.      
  • Global managers can look to partnerships and sub-advisory opportunities with banks’ wealth management subsidiaries for growth opportunities beyond funds.

Supported by rising demand from investors as well as strong government initiatives, the momentum in ESG investing in China has been rising.

Our latest quarterly review from China Navigator tracks a total of 87 ESG funds across equity, multi asset and bond segments. Clean energy funds made up 70% of China’s ESG fund AUM and accounted for over 90% of the net sales collected in 2020. This is largely due to strong outperformance, as ESG investing remains largely retail driven in China. 

This 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, 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 media 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 being diluted by new entrants to the market.

Alignment to national policy priorities is a critical element to designing investment strategies in China. With President Xi’s ambitious goals on carbon emissions, it 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 that 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, due mainly to their strength historically in debt investment. With growing ESG needs in particulary from a younger generation of HNWIs, 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.

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