The investment environment for ESG in China is rapidly improving, especially after the country announced the target to achieve net zero carbon emission by 2060, according to Invesco.
“We see many opportunities for ESG in terms of sector and investment universe,” Yoshihiko Kawashima, head of ESG of Asia ex Japan at Invesco, told FSA.
Just to name a few, energy companies continue to move away from coal-powered power generation to renewable energy sources, such as solar and wind. Related sectors such as those that are involved in the development of grid infrastructure and energy storage should also be beneficiaries, Kawashima said.
“We also see opportunities in electric vehicle (EV) manufacturers and EV battery makers as the share of EV sales as a proportion of total automobile sales continues to increase,” he added.
More electrification in the industrial sector will help reduce carbon emissions. Invesco believes companies that take a leading role in this area could offer long-term sustainable investment opportunities to investors.
China’s national carbon emissions trading scheme (ETS) was launched in mid-July last year. Although in the first phase it will only cover coal- and gas-fired power plants, its scope could be expanded to other industries in the future. The market leaders in their respective sectors could be beneficiaries of this, the asset manager said.
Key risks
However, Chinese companies lag their peers globally in terms of the scope and quality of the ESG data disclosures.
First, the country lacks unified disclosure requirements. Currently, various ESG disclosure guidelines have differing requirements without a unified set of rules, and companies lack clarity on what is the most material information to provide to their shareholders, external rating agencies and data providers.
Second, companies in China do not have established processes for collecting high-quality ESG data.
Third, a large number of Chinese firms also do not have dedicated personnel for the development of ESG policies and practices. “This makes it difficult for investors to assess companies’ commitment to ESG and their performance,” said Kawashima.
Finally, there is a lack of ESG coverage by third party rating agencies. “If this coverage increases, it can be a driving force for Chinese companies to improve ESG disclosures and reporting,” said Kawashima.
Invesco’s ESG approach in China
Invesco’s ESG-related investment analysis is fully integrated within Invesco’s investment process: ESG screening, ESG integrated research, portfolio construction and active ownership, according to Kawashima.
For ESG integrated research, alongside financial indicators, the evaluation of ESG factors is critical to the investment process. Invesco’s investment team conducts its own ESG analysis, utilising Invesco’s proprietary ESGIntel rating platform and external information obtained from company disclosures, dialogue with the companies and third-party ESG ratings and research.
“We aim to identify material issues that can have impacts on a company’s financial health and long-term business performance,” he said. Portfolio managers and research analysts are required to explicitly state whether fair value will be adjusted from an ESG perspective.
“As such, the evaluation of ESG aspects is incorporated into the wider investment process as part of a holistic consideration of the investment case,” said Kawashima.
