The lack of historical and quality data is a barrier to integrating ESG factors into the investment process in China, said various domestic fund managers during a roundtable discussion included in the report.
“We believe the key challenge is the lack of comparable historical data to perform extensive analysis,” said Robert Li, senior investment strategist at Harvest Fund Management (at the time of the roundtable discussion, he was an investment strategist at China Asset Management).
Yan Xu, chief investment officer at Hwabao WP Fund Management, noted that the availability of ESG data started late in China compared with other countries. Only one-third of listed companies issue corporate social responsibility (CSR) reports.
“Some specific data such as environmental data is compulsory for some sectors and companies, but not all of them. Therefore, we have an incomplete dataset of ESG company data,” she said.
Xu added that ESG data provided by third-party vendors is also limited.
Data purchased from international vendors, such as FTSE and MSCI, can only provide ESG data for companies that the indices cover, which does not include the whole onshore market, she explained.
In addition, although local index companies have started to build their ESG database, Xu finds that the methodology behind their ESG ratings is not transparent, with no third-party companies to verify the quality of the data.
Wilson Wei, equity analyst at E Fund Management, added that although 800 companies in China have issued CSR reports, much of the information is irrelevant.
“Companies have not realised what issues are more important to investors and what information they need to disclose to better reflect their ESG performance,” he said.
ESG awareness remains low.
“For example, when we engaged [with] a company to disclose its emission targets, it took time to explain [the reasons why]. The response however is positive and they do agree that they should manage their environmental impact and try to include our suggestions in the next year annual reports.”
Harvest’s Li added that Chinese companies may be aware of CSR, but not necessarily ESG investing.
“Their primary motivation comes from regulatory requirements,” Li said. “Given the current regulatory efforts and pending disclosure requirements, many companies are beginning to learn about these concepts and practices.”
In 2017, the China Securities and Regulatory Commission (CSRC) and the country’s Ministry of Environmental Protection introduced new regulations that will require all listed companies and bond issuers to disclose ESG risks associated with their operations by 2020.
“We believe that after the mandatory disclosure requirements in 2020, there will be enough data for further analysis within a few years, after which ESG investments will be based on solid ground and investor adoption should improve,” Li said.
Given that the concept of ESG is relatively new in China, only a few managers have started to include ESG factors in their investment processes.
“Roughly 80% or 90% of Chinese investors [including fund managers and institutions] haven’t come up with the structure for ESG investing,” E Fund’s Wei said.
Hwabao’s Yan added that local institutions are currently undergoing training and attending conferences and workshops organised by the stock exchanges and the Asset Management Association of China (Amac) to understand how to implement ESG integration.
In a separate interview also included in the report, Yu Hua, board director at the Amac and managing director at Morgan Stanley Investment Management, said the lack of experienced people also limits ESG integration.
“[Chinese firms] are relying on expertise and advisory services of international firms and experts to develop and operate their ESG-related products and processes.”
He added that regulatory reporting standards, data integrity standards and transparency standards are also needed.
The driver for ESG investing is coming from international investors, especially US- and Europe-based institutions, according to E Fund’s Wei.
Hwabao’s Yan added that after last year’s inclusion of China A-shares in MSCI indices, more international institutions pushed the concept of ESG.
Nevertheless, domestic pension funds and insurance companies are supportive of ESG investing, Yan said, noting that they have started pushing fund managers to create ESG products.
“ESG products have features of higher returns and lower volatility, which aligns with their investment philosophy,” she said.