Covid-19 may fast track ESG reforms
As the second-biggest asset management market in the world, China is in a key position to push the rapid development of sustainability investments globally
30 Mar 2020 | Bayani S Cruz

THERE may be a bright side to the global pandemic triggered by the Covid-19 virus wildfire spreading out of China.

While everybody is preoccupied with the negative impact on the global economy arising from the mass quarantines around the world and the disruption of supply chains, the virus is quietly pushing widespread awareness on the urgency of implementing sustainability investing and environmental, social and governmental (ESG) reforms not only in China but in the rest of the world as well.

While sustainability and ESG investing has become a mainstream for major European and US asset owners and managers in recent years, it was only during the past 12 to 18 months that their Asian counterparts have seemingly taken to paying serious attention to these issues.

The Hong Kong Exchange’s recent announcement of stricter ESG reporting rules for corporates, for example, is designed to make board members directly accountable for their companies’ ESG key performance indicators (KPIs). Companies who do not comply may soon find it difficult to generate financing as their investors demand better KPIs for ESG.

In China, Covid-19 and the accompanying ecological issues that created the problem (Covid-19 came from wild animals that arguably are not really suited for human consumption) may be thrusting the issue of sustainability and ESG investing into the consciousness of asset owners, regulators and corporates.

Outside of China, it cannot be argued that the pandemic is creating a global awareness in the investor community that the world’s ecological imbalances have to be addressed seriously and a key solution lies in implementing sustainability and ESG investing urgently.

Still, as the second-biggest asset management market in the world, China has a very important role to play in speeding up the implementation of sustainability and ESG investing to the point where it can tip the scale in terms of the world’s success and failure.

In terms of size, a study by McKinsey indicates that while developed markets still account for the majority of global assets under management, China’s asset management sector alone is projected to exceed US$5 trillion by 2021, while the total market, which also includes fund houses, insurers and trust companies, will surpass US$22 trillion by 2021.

In terms of a timeframe, the world has only 10 years to achieve the sustainable development goals (SDGs) adopted by the United Nations (UN) in 2015 as a universal call to action to end poverty, protect the planet, and ensure that all people enjoy peace and prosperity by 2030.

This means that in order to realistically achieve these goals within this timeframe, China’s asset management sector must waste no time in jumping on the sustainability and ESG investing bandwagon.

Although there has been some progress, with some Chinese institutions and asset managers becoming signatories to the UN Principle of Responsible Investments (PRI) and Chinese issuers coming out with green bonds, the Chinese asset management industry and capital markets are still at their infancy when it comes to sustainability and ESG investing.

By 2018, only about 18 Chinese institutions had joined UNPRI, including 13 investment managers and five other institutions, a much lower number than the 414 institutions in the US and the 339 in the UK.

To say that there is a sense of complacency in the Chinese financial markets in general cannot be entirely ruled out.

A case in point, China currently accounts for 27% of the world’s greenhouse gas (GHG) emissions that cause global warming, making it the world’s largest contributor. And, in 2019, it actually increased its carbon dioxide (CO2) emissions to 0.26 gigatonnes (Gt). This resulted mainly from its renewed reliance on coal power plants for power generation.

At the same time, the US and Europe were reducing their reliance on coal, resulting in a drop in GHG emissions for the rest of the world by 0.02Gt of CO2.

According to Climate Action Tracker, an independent think-tank, although there had been hopeful signs that China's CO2 emissions were flattening previously, increased fossil fuel consumption drove an estimated 2.3% increase in Chinese CO2 emissions in 2018 and 4% in the first half of 2019, marking a third year of growth after emissions had appeared to level out between 2014 and 2016.

Exacerbating this deteriorating picture is the fact that China started to construct 28 gigawatts (GW) of new coal-fired power capacity in 2018 after lifting a previous construction ban, bringing its total coal capacity under construction to 245GW, according to Climate Action Tracker.

But despite these dire developments, or perhaps because of them, China’s asset owners appear to be waking up from their complacency.

Perhaps an indication of this is the recent announcement by Ping An Insurance Group that it will stop financing high pollution and high energy consumption industries as part of its efforts to combat climate change and become an active global influencer on ESG.

Buried in its 2019 sustainability report issued on March 5 in the midst of the coronavirus crisis, the insurance giant’s statement aimed at addressing climate change is perhaps the boldest by an asset owner from China, which still relies on coal power plants for most of its energy requirements.

With 8.22 trillion yuan (US$1.2 trillion) in total assets as of December 31 2019, as well as investments in a huge array of businesses, Ping An is big enough and influential enough to push the boundaries of ESG investing in China.

While Ping An’s decision to stop financing high pollution and high energy consumption industries was not made as a direct result of the Covid-19 epidemic, the timing of the announcement gives it more significance and provides some light at the end of the tunnel in the bigger scheme of things. It was actually a bold decision for Ping An considering that it is forsaking investments in coal power plants, which remains a highly lucrative industry that will still require huge amounts of capital in the coming years.

If other asset owners were to follow Ping An’s lead, and there is no reason to think they won’t, it will deprive coal power plants of a huge source of financing. Although they can probably make up for it from other sources like private equity, there is no denying that the asset owners remain a powerful and influential source of financing in China.

In fact, this action by a major Chinese asset owner reinforces efforts by regulators to push sustainability and ESG investing among major Chinese corporates.

The People’s Bank of China (PBOC), for example, is spearheading the Green Finance Committee, a body composed of 60 major Chinese corporates, that is learning how to proactively measure, monitor and manage ESG KPIs. The KPIs include power consumption, water consumption and waste recycling.

More importantly, the Green Finance Committee is working to change the mindset of corporate board directors, chief executive officers, chief investment officers, and chief operating officers in terms of the way they think about sustainability and ESG investing.

“The objective is to make the board members and key executives realize that by being vigilant in the management of these KPIs, they are creating more investment opportunities as well as enhancing the efficiency performance and management capabilities of their companies,” says Priscilla Lu, head of sustainable investments, APAC, at DWS, and a member of the Green Finance Committee.

With the PBOC pushing these efforts, there may be some hope that China’s corporates, asset owners and managers, and the rest of the financial system can get together soon enough to push sustainability and ESG investing before the world runs out of time.

As the second-biggest asset management industry in the world today, China is in a position to significantly improve the world’s position on climate change. The hope is that it can live up to the challenge.

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