ESG thematic investing under the technology era, opportunities in Asia are worthy to watch

For the past several decades, ESG (Environmental Social and Governance) received strong awareness and has become a rapidly growing investment philosophy for global investors in U.S. and Europe. In recent years, China starts to adopt the idea of ESG.

Following the western ESG capital market development path, from “Public movement à green consumption à green manufacturing à green finance”, it’s not hard to realize that the combination of ESG and the Chinese capital market is just a matter of time.

China has a rapidly expanding its asset under management(AUM) pool. Assets under management across mainland China rose by 36 percent to 51.8trn RMB ($7.53trn, £6.0trn) in 2016 according to data from the semi-official Asset Management Association of China (AMAC). In 2015, the growth was 86 percent.

According to Dutch Bank 2014 research, the portion of western capital in the global asset pool is much greater than the capital from Asia.

“ESG investing has gained significant momentum over the past 3 years. Globally, $21 trillion of assets have been invested in ESG or sustainable strategies.”

In the past, companies were mostly concentrated in the power generation sector whereas companies in the transportation sector (early EV start-up, li-ion batteries, Biofuels) were not so successful. But now and the near future, investments with social, environmental impact are more likely to be technology driven, by the industrial internet of things, electric vehicles, agriculture tech, auto tech and water tech. (To read more)

Source: MSCI Blog

MSCI stated that green finance in Emerging Market is one of the six ESG trends to watch in 2017.

“In 2017, domestic and global standards will likely converge as companies in these markets deepen their understanding of standards required to attract foreign capital.”

Since the economic development in China is faster and the pressure from environmental problems is never greater than before, the establishment of ESG and green finance will be faster than western countries, probably in next 20 years.

ESG has been traditionally viewed as a risk-management and screening tool, but now there are more and more thematical investment opportunities that are relevant to the idea of ESG.

The raise of political awareness in green finance

From a policy perspective, the Chinese government’s attitude toward green finance is supportive. In 2015, with the support of People’s Bank of China, China Society of Finance and Banking proposed to build a comprehensive Chinese green finance political system, including to establish the green financial professional institutions, to promote green bond and green sector fund, and to improve the green finance infrastructure and ESG related information disclosure.

In 2016, “green finance” has officially written into the “13th Five-year Plan economic and social development planning”. Early in March and April this year, Shanghai Stock Exchange and Shenzhen Stock Exchange published “Notice about Launching pilot green corporate bonds”.

The growth of social and civic organizations

From a social perspective, many non-profit, research institution and civil organization are accelerating the establishment of green finance in China.

The Institute of Public & Environmental Affairs (IPE) with the news agency Securities Times established the Pollution Information Transparency Index (PITI). IPE investigated in the environmental performance of 17 listed cement companies and found out illegal sewage, and avoid disclosure obligations. To read more

According to Guo Peiyuan, PhD at Tsinghua University and the CEO of Syntao Consulting, and the Inventor of Sustainable Financial Market Readiness Index said that:

“The green finance market in China needs more public company information disclosure and at least one or more standard finance index in the market.”

“ESG first is about risk control and now is also about product creation. From the aspect of product innovation, new generation of investors that born in the 90s and high net worth elderly people, Sovereign funds and pensions are more likely to agree with the long-term return of ESG.”

The great need for Shareholder engagement and resolution

Dutch Bank ESG Report

Above are the 7 industries that Dutch Bank pitched for great future growth. In China, these areas have great investment opportunities with environmental meanings.

According to IPE data, in the past two years, 24 public listed companies in food manufacturing and agricultural product processing industry have one or more environmental violation records. China has become the largest auto manufacturing country, but for the past two years, 124 automotive manufacturing companies have one or more environmental violation records.