30 April 2018
Aligning investor duties with long-term sustainability goals is a prerequisite for balanced, inclusive and green economic development. This conclusion of the report on Investor Duties and ESG integration in China, co-authored by the PRI, UNEP FI, The Generation Foundation and the International Institute of Green Finance of Beijing, also marks the beginning of a new understanding of why investors should integrate material ESG issues in their investment decision making in China.
Part of the Fiduciary Duty in the 21st Century project, the report brings to Chinese investors and policy makers a new interpretation of the concept of investor duties. Based on international and local evidence, it argues that ESG integration means better risk management and returns. It also serves as a guide to help investors contribute to their government’s long-term sustainability goals: building an Ecological Civilisation, and establishing a green financial system.
Since 2016, China has taken a strong stance on environmental protection and green growth. From the work within the G20, to the Belt and Road initiative and national guidelines, green finance has become a centrepiece of China’s international, regional and national policy strategy. But within this framework, many social and governance aspects are also coming into the spotlight. For example, the Ecological Civilisation concept is also looking at social welfare, by aiming to create a ‘moderately prosperous society’. Eradicating poverty is also a national goal. Reflecting the views of the United Nations, the PRI and the OECD, green is also inclusive, and green finance is part of sustainable development.
In Europe, France has taken an early lead by updating its legal framework in 2015 by requiring investors to disclose their management of climate-related risks. The now famous Article 173 of the law for Ecological and Energy Transition meant that France became the first country to introduce mandatory climate change-related reporting for institutional investors. More recently in the UK, the Green Finance Taskforce recommended that ESG be incorporated into fiduciary duty. This has also been the recommendation of the EU High Level Expert Group on Sustainable Finance, which has been adopted within the European Union Action Plan for Financing Sustainable Growth.
China is now gearing up to move in the same direction. The China Securities Regulatory Commission has been working on implementing a mandatory environmental disclosure framework, applicable to all listed companies by 2020. The Asset Management Association of China (AMAC) recently published a report on the state of ESG integration in China and has set the stage for a plan to put ESG more firmly into practice across the asset management sector. The Insurance Asset Management Associate of China will soon start joining forces with AMAC to promote responsible investment in the insurance sector.
At the investor level, six Chinese financial institutions including the world’s largest bank – ICBC, and two largest Chinese asset managers and also PRI signatories – China Asset Management and E Fund– have been participating in the UK-China TCFD/environmental information pilot project, leading the way in setting environmental disclosure frameworks in their sectors, which is expected to drive improvement on information disclosure at the corporate level. Harvest Fund, another recent PRI signatory, and another pioneer on ESG, has clearly stated their intention to build best-in class ESG research team and investment capacities to help contribute to an efficient and sustainable financial system in China.
In order to create a level playing field for sustainable investing, more tangible action is needed. As the report notes, in addition to greater ESG disclosure which is one of the recommendations of the report, investor education, green and sustainable investment products and tools, underpinned by harmonised ESG standards, are all critical to creating an enabling environment for sustainable investment practices. However, these actions alone won’t create a system change. Regulatory action is also necessary to bring ESG integration more firmly into mainstream investment decision making as part of investors’ duties towards their beneficiaries. Collectively, these recommendations will accelerate the rate at which China’s investors align their practices with the goals of green finance and of sustainable development.
Margarita Pirovska, Senior Consultant at UNEP FI / PRI
Nan Luo, Head of China, Principles for Responsible Investment (PRI)