Foreign owned investors lead as locals lag on adoption of ESG in China

Channels: SAA/ALM, Managers, Governance, Asia

Companies: Principles for Responsible Investment, CFA Institute, Hwabao WP Fund Management, E Fund Management

People: Yixi Wei, Xu Yan

Domestic insurers in China are lagging behind their foreign-owned counterparts when it comes to integrating environmental, social and governance (ESG) factors into their investment analyses, according to a report by the Principles for Responsible Investment (PRI) and CFA Institute.

While there has been a significant uptake in integrating ESG in investment processes in China in recent years, this was mainly driven by demand from international investors, the report said.

“After MSCI had included Chinese A market into their indices, there was a surge of interest from international investors to increase their exposure to China’s economic product,” said Xu Yan, CIO at Hwabao WP Fund Management, in a roundtable discussion included in the report.

“Some of these investors had an ESG policy and strategy that they require local investment managers to adhere to.”

However the report noted momentum for issues such as environmental performance and executive pay was also rooted in government policies.

“Thanks to a combination of overseas demand and government policies, ESG investing is now a positive investment trend,” said a section of the report focused on China. “Still, the level of ESG investing is low.”

The reason for this low level of ESG investing is that local institutional investors are holding back.

Nevertheless some local firms start to make in road. Yan highlighted domestic insurers and pension funds in particular as investors who are pushing their investment managers to create more ESG products.

Yixi Wei, an equity analyst who specialises in ESG research and responsible investment at E Fund Management in Hong Kong, said: “In the Chinese market, it will take time for the insurance companies and pension funds to demand [ESG]. They are likely to monitor the investment performance of ESG products first, assess the advantages and disadvantage, and then make a decision.”

The wider Asia Pacific region

According to a poll carried out as part of the report there is  a growing awareness across the Asia Pacific region that ESG issues will become increasingly important.

Of the 339 investors responding to the survey, 64% said governance issues were currently impacting share prices and 43% said it was impacting corporate bond yields and spreads. Asked if they expect such issues to have an impact in 2022, positive responses raised to 73% and 60% for share prices and bonds’ yields and spreads respectively.

But it was environmental issues where the impact is expected to increase the most. While 24% of respondents said environmental issues have an impact on share today, 59% said it will have an impact in 2022. Similarly, 15% of respondents said bonds’ yields and spreads where impacted today and 48% said they would be impacted in 2022.

Adam Leach