As China’s carbon neutral by 2060 pledge spurs sustainable finance regulation, its financial institutions are calling on the government to move quickly on establishing a taxonomy and ESG standards.
The world cannot win the fight against climate change without China successfully transitioning to a low-carbon economy, with it accounting for 27% of global carbon dioxide and a third of the world’s greenhouse gases, according to the World Bank.
To reach net-zero emissions by 2060, the World Bank estimates China needs between US$14-17 trillion in additional investments for green infrastructure and technology in the power and transport sectors alone, and much of this will need to come from the private sector.
But this massive capital need comes as foreign direct investment into China hit an all-time low last year amid increasing tensions with the US. The self-appointed ‘Indiana Jones of Emerging Markets’ Mark Mobius warned earlier this month on the risks of investing in China, claiming he could not get his money out of the country due to capital controls introduced by the government, compounding longstanding concerns about policy risk.
There have also been longstanding concerns on the human rights risks of investing in China – though foreign investors with exposure tell ESG Investor it is unfair to single out the country, pointing to human rights violations happening in the US and Europe too. On the ESG opportunity in China, these investors point to fast-moving regulation in the country driven by its pledge to have peak carbon emissions by 2030 and become carbon neutral by 2060 – the only country in the world with such a target.
Improving transparency and disclosure
Kathlyn Collins, Head of Responsible Investment and Stewardship at asset manager Matthews Asia, says there has been a substantial number of environmental policies introduced in China over the past few years.
Since January 2022, the Ministry of Ecology and Environment (MEE) has required listed companies and bond issuers that have committed environmental violations to disclose environmental information on a mandatory basis, she tells ESG Investor.
Further, the China Securities Regulatory Commission’s (CSRC) instructs listed companies to disclose ESG information to investors, and the Insurance Asset Management Association of China encourages asset managers to incorporate ESG factors into the investment process and actively engage with investee companies in guidance on stewardship.
Also, since January 2022, the Shanghai Stock Exchange and the Shenzhen Stock Exchange listing rules requires issuers to publish a CSR or ESG report, disclose the standard they use to make that disclosure and make timely disclosures around significant environmental and social incidents.
“We have already seen improvements in terms of ESG disclosure,” says Collins. “According to ZD Proxy, in 2022, the number of A-share companies releasing ESG reports accounted for 30.8% of the total, with the percentage of CSI 300 Index constituent companies that have disclosed ESG reports reaching 90.3%.”
These regulatory moves are necessary for China to compete on the international stage on ESG, according to Dr Guo Peiyuan, Chairman of SynTao Green Finance, the founding organisation of China Sustainable Investment Forum (ChinaSIF). “People understand that we have to improve the transparency and improve the disclosure levels in China so that we match global standards, and the market can also tell which companies are green or not green.”
He points to regulator China Banking and Insurance Regulatory Commission launching guidelines last June on carbon neutrality goals and ESG as an important development. “For insurance companies it means they need to consider ESG and green finance issues when selling their insurance products and consider it in their asset management arm as well.”
He tells ESG Investor that China’s ESG market is on an upward trend. A December survey with China-focused asset owners found 90% recognise the importance of ESG. ChinaSIF estimates that the size of China’s ESG market in 2022 was RMB 24.6 trillion (US$3.57 trillion) growing from RMB 18.4 trillion in 2021. Peiyuan predicts this will continue to grow, as more advanced markets in ESG like Europe and US start to decline.
“In Europe there is action on greenwashing and regulation such as SFDR that through improving the quality of the market, will actually reduce the size of the market,” he says, adding that the Republican backlash against ESG investing will likely affect ESG growth in the US.
“It’s quite different in China. People basically understand that green and low carbon will be the future of the financial sector,” he says. “This drive will include improvement on disclosure and transparency.”
Chinese taxonomy and standards
Ping An, a major insurer in China and a leader on sustainable finance, wants the government to introduce national ESG standards as soon as possible to compete with Western efforts.
Gareth Hewett, Group Head of International ESG and PR at Ping An, tells ESG Investor: “The existing mainstream ESG disclosure frameworks and evaluation systems are dominated and created by the Western countries, and there is an urgent need for China to launch an ESG evaluation standard with Chinese characteristics that is in line with the Chinese context.”
Hewett says a key challenge for China’s sustainable finance sector is a lack of unified standards and regulations. “Currently, there is no clear definition of what constitutes a “green” investment, which has led to a proliferation of green bonds that are not truly environmentally friendly.” Efforts by the People’s Bank of China (PBOC) on guidelines and standards has improved the situation, but Hewett says it expects the government to go further and publish something analogous to the EU Taxonomy, to set specific definitions of what is “green” for finance.
Ping An was the first Chinese asset owner signatory to the PRI and is also a signatory to CA100+ where it is the lead engager for the China National Offshore Oil Corporation and a co-engager on coal mining firm Shenhua Energy. These actions, says Hewett, show that Ping An wants to “build a benchmark for responsible investment” in Chinese financial and insurance groups.
Ping An was involved in the development of China’s first voluntary ESG disclosure standard launched last year and has developed innovative investment products focused on poverty alleviation in China and ocean protection.
It has also provided insurance for 415 projects worth RMB 340.1 billion linked to China’s ambitious Belt and Road initiative to scale sustainable infrastructure in developing countries. To date, 147 countries – accounting for two-thirds of the world’s population and 40% of global GDP – have signed up or expressed interest, according to the Council on Foreign Relations.
In total, China has already spent an estimated US$1 trillion on the initiative, with predictions it could reach as much as US$8 trillion.
Solar and EV opportunities
Investment opportunities within China to scale renewable and sustainable infrastructure are also huge, says Matthews Asia’s Collins.
China is currently the world’s largest producer of wind and solar energy, she says, adding two to four times more in capacity than the EU or US in recent years.
While China reportedly broke records for coal output in 2022, it also broke records for new solar capacity added last year, according to figures from the National Energy Administration, installing a total of 87.41 gigawatts. Last month, it was announced that China will further accelerate the construction of solar and wind power generation facilities in the Gobi Desert and other arid regions.
Collins says there is still lots of opportunities for growth, especially in solar power which benefits from strong policy support and is cost competitive. Power grid upgrades and energy storage technology are also good areas, she says.
The electric vehicle industry is another good opportunity with China targeting 40% of new vehicle sales to be EV by 2030. “We are looking at 10 million EVs on the road [globally] and by 2040 that is expected to be 600 million. The largest share of that will be in Asia,” she says.
On human rights risks, Collins says these issues are not unique to China. According to Human Rights Tracker China scores better than average on quality of life, but poorly on civil liberties, political freedom and safety from the state.
“The best way to encourage the [Chinese Communist Party] to further improve its behaviour is to engage with China socially, economically and politically, providing incentives and models to follow,” says Collins.
She adds that it is “very careful” about its choice of investment partners and holds only about 3% of China’s listed universe.
Marilyn Waite, who leads the Climate Finance Fund that covers China, the EU and the US, says all three regions can improve when it comes to justice, equity, diversity and inclusion (JEDI). The Chinese common prosperity framework helps provide investors a basis to apply a JEDI lens, she says.
Like Collins and Peiyuan, Waite says China’s regulatory environment is helping to catalyse and improve sustainable finance in the country. She points to China’s plans to create a new financial regulator that will pull the financial elements of various agencies under one umbrella, leading to better co-ordination and notes its central bank – the People’s Bank of China (PBoC) – has been one of the most advanced globally on green finance.
PBoC has provided a more affordable rate for green lending against other types of loans, she adds.
Sustainable finance development in the country is also seen as helping international cooperation, as global tensions between the US and China continue.
China and the US still co-Chair the G20 sustainable finance working group, with topics including green finance to support green technology, impact investment and capacity building, says Peiyuan.
The International Sustainability Standards Board (ISSB), has a Chinese board member – Bing Leng, a director in the accounting regulatory department of the Chinese ministry of finance.
Frankfurt-based ISSB has been launched by the influential International Financial Reporting Standards (IFRS) to develop a global baseline for sustainability disclosure, which regional regulators and lawmakers can then build on.
“ISSB is one example of sustainable finance fostering international cooperation. It is going to establish an office in Beijing in mid 2023,” says Peiyuan.