The ESG Boom in China
Updated: Oct 7, 2022
Fund manager Hou Chunyan made a direct appeal to China's rising number of individual investors in a 40-minute webcast in June: ESG investment is particularly compatible with Beijing's growing quest for carbon neutrality and "common prosperity."
The pitch is working, thanks to President Xi Jinping's net-zero commitment and anti-poverty programs. Already one of the largest green bond issuers, the number of ESG, "sustainable," and "green" portfolios has expanded. According to Bloomberg statistics, at least 112 of these new funds have launched in the last 20 months, roughly double the number of debuts in the preceding four years combined.
According to a Fidelity International poll, retail investors in China are more interested in these sorts of funds than those in other key Asian countries. Since the beginning of 2021, assets under management have more than doubled to about $50 billion.
What Chinese asset managers designate as "ESG" is closely aligned with Beijing's political aims, which include a net-zero target by 2060, as well as energy security, rural employment, and poverty alleviation. According to Bloomberg statistics, almost 15% of the more than 170 ESG funds based in China are invested in coal businesses, which are by far the country's largest source of greenhouse gas emissions. More than 60% have stakes in the steel sector, which consumes a large portion of the country's coal.
“People say ESG like we’ve agreed upon what it is — we’ve not,” said Bradford Cornell, a financial economics professor at UCLA. “In China, the rules on environmental and social issues are made by the Chinese Communist Party.”
China's unique approach exhibits some of the worldwide appeals of a basic ESG concept, which states that firms that address environmental costs and social risks will yield superior profits in the long run. It also demonstrates that nations and regions have a lot of leeway in defining those costs and hazards for themselves – frequently at conflict with one another.
With its rural employment programs, alcohol giant Kweichow Moutai Co. is one of the top holdings in the CSI 300 ESG Leaders index, which measures the 100 Shanghai- and Shenzhen-listed businesses with the best ESG ratings. Another top holding is China Shenhua Energy Co., which generates 78% of its income from coal mining and so contributes to energy security.
The market was practically non-existent until President Xi Jinping proclaimed two years ago that China would achieve "carbon neutrality" by 2060. A year later, Xi added "common prosperity," which was widely thought to involve additional anti-poverty initiatives, and large state funds began to request investments that aligned with those aims. Chinese ESG funds also began making significant investments in "green" industries such as electric vehicle manufacturers and solar energy enterprises.
Chinese ESG funds are down 12.5% on average this year, compared to the CSI 300 Index's 18% loss. Globally, ESG funds have outperformed the broader market, despite the fact that a multitude of them have tech-heavy, energy-light holdings.