ESG fund assets in China are estimated to be $5.9bn or 0.28% of the total onshore mutual fund industry AUM of $2.1trn, according to a recent report from Shanghai-based Z-Ben Advisors.
In the US, by comparison, ESG-mandate funds collected $321bn in assets or 1.25% of the US mutual fund industry, which was worth $25.7trn as of the end of last year.
In Europe, ESG-mandate funds have amassed $750bn, accounting for 4% of the $18.8trn fund industry, the report noted.
“One reason for the small proportion in onshore China is that there is no executable document [requirement for standardized disclosure] about ESG,” Ivan Shi, director of data analytics at Z-Ben Advisors and an author of the report, told FSA.
“Even though regulatory bodies like the Asset Management Association of China (Amac) has released ESG-related documents, they are not for listed companies and the market is waiting for the [requirement for standardized disclosure] from the Shanghai Stock Exchange and Shenzhen Stock Exchange,” Shi added.
The report also noted that “[for now], A-share companies vary greatly as some have taken the initiative to proffer thorough information, particularly when transparency encourages investment in nascent industries. But the overwhelming majority of companies don’t provide complete, audited and verifiable disclosure on ESG issues.
“In turn, many A-shares are not thoroughly covered by ratings providers onshore. Fund managers hence find it difficult to [integrate] ESG analysis into their investment processes,” the report added.
Another reason is that acquiring objective ESG data remains a major obstacle for fund managers because there are multiple ESG data providers and further confounding the issue are the metrics used by these providers do not always overlap, according to the report.
Moreover, the implementation of ESG in onshore China is not transparent.
“For the most part, fund materials [such as factsheets] are vague on the particulars of ESG investing, followed by even more vague descriptions (or even none at all) of how it applies to principal strategies.
“For nearly all of the products on offer, it’s nearly impossible to gain insight into how ESG is actually being incorporated into management of the funds,” the report said.
Foreign partners needed?
“Only select large managers are currently making the effort to invest in proprietary ESG coverage and expertise. Not even a dozen mutual fund managers have at least one explicit ESG product.
“Much of the incentive for local fund managers to promote ESG lies in relationships with global asset owners,” the report said.
Foreign fund houses are also introducing ESG funds in China.
Last month, China Asset Management and Netherlands-based NN Investment Partners announced the launch of the NN (L) International China A-Share Equity Fund which the firms said is the first ESG Ucits fund managed by a mainland-based asset manager.
The two firms hope to overcome some of the obstacles to mainland ESG investing by using NNIP’s tools and methods to screen onshore investments. However, in Asia the fund remains available to professional investors only.
“For retail investors, ESG simply isn’t decisive yet. Little evidence has materialized in fund flows that meaningful demand for ESG exposure exists,” the report said.
Moreover, according to an industry survey of asset managers in 2019 (not only mutual fund companies), about 40% of them plan to incorporate ESG factors into their investment processes in the next 1- 2 years.
However, just 16% either had a firm-level ESG strategy or had fully integrated ESG factors into their investment, the report noted.
At the same time, some managers still regularly tout their ESG capabilities.
“Distribution platforms will occasionally give banners to ESG funds, although these promotions tend to focus on novelty rather than underlying investment processes. And while many firms are also eager to put a fleeting spotlight on certain signing ceremonies, such as UNPRI, just a handful have dedicated ESG teams in place that work with portfolio managers,” the report said.
Once the stock exchanges follow through on requiring standardized disclosure of ESG metrics, firms will begin to follow. As data becomes more comparable across securities, fund managers will be able to more effectively incorporate ESG metrics into their portfolio decisions, according to the report.
“When that happens, more should start to promote these capabilities to retail investors who will need plenty of education on ESG investing,” the report added.