China’s ESG integration remains cautious as investors in Australia, Hong Kong and Singapore explore ESG risks and opportunities.
While China has seen growing interest in the ESG investment space over recent years, limited awareness and lack of standardised investment practices is holding back growth, according to Cerulli’s new report.
According to ‘The Cerulli Edge – China Edition, 4Q 2020’, Chinese managers report low demand for ESG products as investors continue to be concerned about generating returns. But more than half the managers surveyed also said they intend to launch ESG-focused products over the coming two to three years.
“With continued regulatory support, the gradual opening of domestic capital markets, and an increasing number of product launches by various asset management players, we see good prospects for China’s ESG integration journey in the long run,” said Ye Kangting, Senior Analyst at Cerulli.
The report noted that Chinese asset managers are developing ESG strategies through a variety of vehicles, such as mutual funds, ETFs, wealth management products and private funds. There were 47 ESG mutual funds and ETFs in China, as of June 2020, increasing combined assets under management (AUM) by 32.3% compared to the end of 2019 – a total of US$7.3 billion.
China’s state-run pension fund, the National Social Security Fund (NSSF), issued requests for proposals (RFPs) for global responsible investing active equities in August 2020. This marks the first time a major public pension in China has included a sustainable investing consideration in its RFPs.
Rising ESG expectations in Asia
Large asset owners across the Asia-Pacific region are increasing their demands for ESG-aligned practices from asset managers, according to Cerulli’s ‘Responsible Investing in Asia 2020: On the Cusp of Change’ report.
Cerulli noted that large institutional investors – especially those in Australia, Hong Kong and Singapore – are increasingly incorporating ESG factors into their assessments of risks and opportunities. However, screening strategies still dominate in Southeast Asia.
The report added that both ESG mutual fund assets and ESG ETFs have grown across most Asia-Pacific markets between 2018 and the first half of 2020.
Cerulli highlighted that ESG integration is proving to be the most popular strategy. Corporate engagement and shareholder action saw an uptick in 2019.
Asset owners’ expectations of portfolio-level exposure to climate risks are increasing, with 71% of survey respondents requiring asset managers to report on this aspect over the next two years, compared to the 31% who expect this today.
Asian investors that focused exclusively on the governance aspect of ESG when making investment decisions have now started paying attention to environmental factors, Cerulli stated. Australian superfunds lead in assessing climate risks, but other major institutional investors in Hong Kong, South Korea and Singapore are taking beginning to look to include environmental factors into their portfolios.