Covid-19 may be a watershed moment for climate strategies in Greater China
Climate related strategies such as green bonds have been on the radar of investors in China, Hong Kong, Macau and Taiwan as financial authorities in the region collectively known as Greater China put greater emphasis on sustainable investing.
China, for example, has been promoting green finance and environmental, social and governance (ESG) investing at the policy and regulatory level. Beijing has been working to build a green finance system since 2016, with guidelines on green finance product standards and ESG disclosure.
In 2018, industry group Asset Management Association of China issued green investment guidelines requiring regular submission of green investing evaluation reports from fund managers.
Sustainable investing in the Greater China region has been “steadily developing in recent years on the back of increased awareness and growing market infrastructure”, says Joy Song, co-chair of the Hong Kong Green Finance Association’s ESG disclosure and integration working group, and vice general manager of CECEP Environmental Consulting Group.
However, she says China still needs to address issues such as data transparency.
David Wong, senior investment strategist and head for Asia business development for equities at AllianceBernstein, describes the coronavirus crisis as a “watershed moment” for sustainable investing in Greater China.
According to Mr. Wong, the crisis has made investors more aware of stakeholder capitalism, which holds that environmental and social considerations will probably align investment portfolios better with government regulations and social demands.
He says investors are also increasingly favouring sustainable investing because strategies focusing on reduction in carbon dioxide emissions and fossil fuel have significantly outperformed broader markets in recent years.
In China, interest in sustainable investment is evidenced by investors’ participation in the United Nations-supported Principles for Responsible Investment (PRI). Of the 3,000 global signatories to the principles, 50 are from China, including large firms such as Ping An Insurance.
Paul Milon, ESG investment specialist for Asia Pacific at BNP Paribas Asset Management, says financial regulators are playing a key role in the growth of sustainable investing in Greater China by developing an “enabling environment”.
This May, the Hong Kong Monetary Authority and the Securities and Futures Commission established the Green Sustainable Finance Cross-Agency Steering Group to support the government’s climate strategies.
“We believe sustainable investing, and in particular as regards to climate, is set to accelerate in Greater China,” Mr. Milon says.
Some institutional investors in the region are working hard to follow the lead of Japan’s Government Pension Investment Fund (GPIF), according to Juan Aronna, head of investment solutions and products for Asia at RBC Wealth Management. GPIF, the world’s largest pension fund, has been at the forefront in Asia in incorporating ESG factors into investment portfolios.
Hong Kong’s Exchange Fund, for instance, included ESG and green finance principles into its investment processes in 2019. The fund is Hong Kong’s foreign reserves for defending the value of the local dollar.
However, sustainable investment in Greater China is still very much policy-driven, unlike in Europe or the US where it’s primarily promoted by shareholders and activists. “In many ways, you could say [it] is a push effect rather than a pull. The investible universe may currently be small but we expect it to grow steadily,” Mr. Aronna says.
Green bond market
China is the world’s fourth largest issuer of climate bonds, with $13.5 billion sold since 2016, accounting for 13.3% of the global market share. This is in spite of the fact that its issuance dropped to a four-year low because of the coronavirus crisis.
China sold US$1.03 billion of green debt in the first quarter of 2020, the least since the second quarter of 2016, according to UK research firm Climate Bond Initiative.
Still, its green bond market is expected to continue growing this year, Mr. Milon says, noting that there were two Chinese climate bond issuances with a combined worth of over $2 billion this year, representing two-thirds of the country’s 2019 total.
He expects the global green bond market growth to be driven by China’s heavy investments in climate risk mitigation in areas such as renewable energy and related infrastructure.
But China’s onshore green bond market does not follow international practices, which could hinder foreign investment. For instance, proceeds from debt sales do not have to be dedicated only to green projects. Mr. Milon says Chinese companies will likely have to fine-tune their green bond offerings in order to attract foreign investment.
Nevertheless, Chinese green bonds have been gaining popularity among international investors, says Chaoni Huang, vice president and secretary general of the Hong Kong Green Finance Association, and head of sustainable capital markets and global markets for Asia Pacific at BNP Paribas.
Citing figures from the Climate Bond Initiative, she points out that green bonds sold by Chinese institutions overseas grew 30% year-on-year in 2019. She says foreign investments in such offerings are a market force that will spur onshore green bond practices to be on par with international standards.
Greater China investors are increasingly using international stewardship codes, or setting their own internal codes, in order to facilitate the integration of ESG into their investment processes.
Mr. Wong believes international frameworks such as the Climate Financial Disclosures can help institutional investors in the region by providing a yardstick to asset climate risk. He says these frameworks will allow the investors to have a “common language” to communicate with global counterparts to improve the flow of information.
One major challenge for the adoption of climate strategies is in measuring performance because there isn’t a one-size-fits-all method for climate asset-price modeling. Mr. Wong says it’s hard for investors to quantify longer-term climate risk and the price of climate projects, such as the impact of rising sea levels on coastal communities and assets.
He urges companies to disclose more environmental data, such as their carbon footprints, which could help investors gauge the green effect of their investments more accurately.