(Hong Kong, Shanghai, 2 December 2020) Environmental, Social and Corporate Governance (ESG) investing is enjoying a boom in China, according to the latest report from the Ping An Digital Research Center (PADERC), part of Ping An Insurance (Group) Company of China, Ltd. (hereafter “Ping An” or the “Group”, HKEX: 02318; SSE: 601318). ESG-themed funds are growing in number and issuance size and outperforming the China market average.
The report, ESG Investing in China, says capital flow into ESG-themed exchange-trade fund (ETF) investment in China increased 464% between 2018 and 2019. China has benefitted from a global trend of inflows into ESG-themed ETFs, which hit a record high in 2019 of US$20.5 billion, four times the volume of 2018 of US$4.9 billion.
The report also found that ESG funds are outperforming the China market average. For ESG equity funds, since 2020, the annualized return for pure ESG funds was 47.07%, environmental-based funds 70.02%, pan-ESG concept funds 56.4% and corporate governance funds 47.91%. The annualized return rate of all ESG equity funds has exceeded the average of 42.22% for the overall equity fund market.
The opening of China's capital market is attracting more and more international capital seeking ESG investments, which is raising awareness and increasing interest in ESG investment principles in China.
“With the rapid growth in ESG-linked investments, we are seeing an increase in the quantity and quality of ESG disclosures from Chinese companies. Domestically, there is also an increasing level of stringent regulatory requirements for ESG disclosures and broader guidance on governmental initiatives aiming to build a ‘green financial system’,” said Chenxi Yu, Deputy Director of PADERC.
Our research on Chinese ESG investment market reveals the following trends:
- Greater attention on ESG within Chinese capital markets: The number of ESG thematic reports increased from one in 2017 to 53 this year. With the use of Natural Language Processing (NLP) technology, Ping An analyzed 103 ESG thematic research reports issued from 2017 onwards and identified that the content has shifted from conceptual descriptions to specific investment products and analyses of their performance.
- “Pure ESG” indices in China doubled in 2020: Out of the 19 “pure ESG” indices in China’s market, four were released before 2019, six in 2019 and nine in 2020. The indices employ an index strategy in which a company's ESG score is explicitly used as a screening criterion. As more of these indices are released, they offer increasing diversity in investment strategies.
- Size of ESG funds in China has grown significantly since 2019: The total issuance size of ESG-themed funds increased by 36% compared with the end of 2019, doubling from the rate in the previous year.
The report provided insights and suggestions for the future development of ESG investment in China, including:
- Improve data and rating coverage within the domestic stock markets to support the development and enrichment of ESG-themed investment products.
- Use alternative data and technology, such as NLP, to help investors distinguish between truly ESG-compliant companies from “greenwashing” ones, whose disclosures do not reflect their actual performance.
- Establish ESG ratings and data for bonds and their issuers to accelerate the integration of ESG in fixed income investment.
- Develop more diversified ESG products, such as passive funds, quantitative funds and investment products for the primary market, to provide more options for investors.
- Innovate and develop financial products focused on climate risk mitigation and the transition to a low-carbon economy, as China increases its emphasis on climate change transition measures.
Download the full report: Press here