ESG investing is enjoying a boom in China, according to the latest report from the Ping An despite the fact that the world's second-largest economy has the worst ESG ratings of any major market.
The report, ESG Investing in China, says capital flow into ESG-themed exchange-trade fund (ETF) investment in China increased 464% between 2018 and 2019. China has benefitted from a global trend of inflows into ESG-themed ETFs, which hit a record high in 2019 of $20.5bn, four times the volume of 2018 of $4.9bn.
The report also found that ESG funds are outperforming the China market average. For ESG equity funds, since 2020, the annualized return for pure ESG funds was 47.07%, environmental-based funds 70.02%, pan-ESG concept funds 56.4% and corporate governance funds 47.91%. The annualized return rate of all ESG equity funds has exceeded the average of 42.22% for the overall equity fund market.
With the rapid growth in ESG-linked investments, we are seeing an increase in the quantity and quality of ESG
However, Chinese companies have an average FTSE4Good rating of just 1.5 out of 5, compared to an emerging market average of 2.1 and a developed market equivalent of 3, with the UK at 3.7.
Still, the number of companies that have committed to global environmental, social and corporate governance (ESG) efforts has also increased. According to the report, 51 China-based companies have signed on to the United Nations-backed Principles of Responsible Investment (PRI), which offers a blueprint for companies to incorporate ESG investment practices.
In 2017, only seven Chinese investors were signatories. Asset managers led the charge, with 39 of the China signatories of PRI being asset managers, 10 being service providers and only two asset owners. Ping An Group was the first China asset owner to have signed Climate Action 100+ and the UN PRI, in December and September last year, respectively.
The opening of China's capital market is attracting more and more international capital seeking ESG investments, which is raising awareness and increasing interest in ESG investment principles in China.
"With the rapid growth in ESG-linked investments, we are seeing an increase in the quantity and quality of ESG disclosures from Chinese companies. Domestically, there is also an increasing level of stringent regulatory requirements for ESG disclosures and broader guidance on governmental initiatives aiming to build a 'green financial system'," said Chenxi Yu, deputy director of PADERC.