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Understanding ESG in China in One Article

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一、introduction

China's economy is currently in a critical period of structural transformation. The report of the Nineteenth National Congress of the Communist Party of China made it clear that China's economy has shifted from a stage of high-speed growth to a stage of high-quality development, and is now in a critical period of transforming development methods, optimizing economic structure, and transforming growth drivers. While the growth rate of China’s economy is declining, it is also facing a series of medium and long-term problems: first, the degree of aging is deepening, which will not only drag down the potential economic growth rate, but will also lead to the continuous expansion of the long-term income and expenditure gap of pension funds. Repayment pressure on the pension system. Second, the gap in income distribution is widening, and the problem of unbalanced and unstable development is prominent. Therefore, the central government put forward the goal of "common prosperity" in the "14th Five-Year Plan" and the long-term goal of 2035. The third is that the issue of climate change is prominent. In September 2020, China put forward the "30.60" goal of carbon peak and carbon neutrality. How to smoothly realize the adjustment of energy structure and promote the green and low-carbon transformation of the economic development model is a challenge for the Chinese economy. Another challenge. In recent years, the environmental, social and corporate governance (ESG) investment concept has increasingly attracted the attention of various domestic sectors. We believe that the promotion of ESG investment and its concepts is expected to become an important starting point to solve the above problems. The follow-up arrangement of this article is as follows: the second section summarizes the origin, development and current situation of ESG investment at home and abroad; the third section explains how ESG investment can deal with the aging problem; the fourth section analyzes how ESG investment participates in the adjustment of income distribution; the fifth section analyzes ESG investment How to promote the realization of dual carbon goals; the last section puts forward relevant policy suggestions.

二、ESG Investment profile

(1) The origin and development of ESG investment
The United Nations Principles for Responsible Investment (UN PRI) defines responsible investment as investment strategies and practices that incorporate environmental, social, and governance factors into investment decisions and active ownership. Also known as sustainable investing, ethical investing, and impact investing, among others. From the perspective of environment (E), ESG investment focuses on climate change, resource consumption, waste, pollution and deforestation; from the perspective of society (S), ESG investment
From the perspective of corporate governance (G), ESG investing focuses on bribery and corruption, executive compensation, board diversity and structure, political lobbying and contributions, and tax strategies wait. Generally speaking, the ESG investment philosophy means that in the decision-making process, in addition to paying attention to the traditional corporate profitability and financial status, investors should also consider the company and social value reflected in factors such as the environment, society and corporate governance. The concept of responsible investment was born earlier, and ESG is a responsible investment concept that has only been clarified in recent years. Its development has gone through three stages: First, from the 1920s to the 1960s, some religious and social groups used tobacco, gambling, Arms and other content contrary to its ethical values ​​were excluded from the scope of investment, forming the germination of responsible investment; second, from the 1960s to the 1980s, environmental protection was added to the concept of responsible investment as a mainstream value; third, from the 1990s to the present, The concepts of sustainable development and green finance have become popular. The United Nations Global Compact first proposed the concept of ESG in 2004. In 2006, UN PRI further merged corporate governance with environmental and social responsibilities, and formally clarified the three connotations of ESG investment. Since then, the ESG concept has continued to deepen, evaluation standards and investment products have been further improved, and many institutions such as national sovereign funds and pension funds have gradually accepted and started to practice the ESG investment concept.
(2) International practice of ESG investment
In recent years, the scale of overseas ESG investment has grown significantly, the investment system has gradually improved, investment rating standards have been enriched, and institutional investment strategies have also shown diversified development. The international practice of ESG investment presents three characteristics: First, the scale of global responsible investment management assets continues to expand. So far, UN PRI has established cooperative relations with more than 4,000 signatories in more than 60 countries. According to statistics from the Global Sustainable Investment Alliance (GSIA), the scale of global sustainable investment reached US$35.3 trillion in early 2020, an increase of 15% from 2018; In 2018, it increased by 2.5 percentage points. In terms of regional distribution, the scale of sustainable investment in Europe and the United States is obviously leading. Among them, Europe has the largest number of institutions that have signed contracts with UN PRI (2,427); North America has the largest sustainable investment scale (US$17.1 trillion). Second, ESG investment is mainly voluntarily promoted by institutions and international organizations. For investment institutions, investing in ESG projects can not only avoid financial losses that may be caused by climate, environment and social risks, but also create a good image of social responsibility. For enterprises, practicing the ESG concept will greatly increase investment in the short term (such as establishing relevant departments, improving disclosure standards, and monitoring information, etc.), but good ESG performance can reduce financing costs, improve risk identification capabilities, and expand investment attraction. The proceeds will cover the upfront costs. Under the voluntary promotion of investment institutions and non-profit organizations, the United Nations and other international organizations have gradually established ESG-related principles and frameworks, forming a relatively complete ESG investment system. Third, the global ESG rating system has not yet been unified. At present, there are differences in the specific content and assessment focus of ESG ratings by different institutions. Take the internationally popular MSCI (Morgan Stanley Capital International, MSCI) and Thomson Reuters (Thomson Reuters) ESG evaluation systems as examples. The former focuses on examining the impact of corporate governance indicators on companies and industries; Scoring of disputed items.
(3) Domestic practice of ESG investment
Compared with developed countries, my country's ESG investment started relatively late, and its initial development speed is relatively slow. But so far, my country's ESG investment field has become increasingly diversified, and the market size has a large room for growth. First, the domestic ESG market is still in its early stages of development. On the one hand, domestic ESG investment has grown rapidly but its volume is still low. As of September 2021, 72 institutions in mainland China have signed the PRI guidelines, and the number of pan-ESG funds has risen to 126, with a total size of more than 210 billion yuan (about 32.5 billion U.S. dollars). Accounted for only 2.6%. On the other hand, domestic investment institutions do not pay much attention to ESG. By the end of 2020, although more than 90% of institutions have stated their concern for ESG investment, only 20% actually participate in ESG investment. Second, government guidance and policy drive are the main drivers of the domestic responsible investment market. The ESG policy system mainly includes three aspects: the first is ESG information disclosure principles and guidelines, the second is corporate ESG evaluation systems and standards, and the third is ESG investment and behavior guidelines. The current domestic system construction mainly focuses on the first point. In recent years, government agencies such as the Ministry of Environmental Protection, the China Securities Regulatory Commission, the Hong Kong Monetary Authority, and the Hong Kong Stock Exchange have all put forward specific requirements for corporate ESG information disclosure from different perspectives. In addition, there are relatively few regulatory policies on the evaluation system and investment behavior guidelines, and they mainly focus on the environment and green investment. Third, domestic institutions have yet to reach a consensus on ESG evaluation criteria, and information disclosure needs to be improved. On the one hand, there is no unified ESG evaluation system in China. Since various institutions (such as China Securities ESG evaluation system, Hexun CSR evaluation system, SynTao Green Finance ESG evaluation system, etc.) have chosen different indicators and calculation methods, the rating results are also significantly different. difference. On the other hand, the current ESG information disclosure method is "semi-mandatory + voluntary", which has no direct financial benefits and increases time and labor costs. Listed companies are generally not willing to disclose. Although domestic ESG investment is still in the early stages of development, the extensive and in-depth development of ESG concepts is undoubtedly a major trend. Due to its unique social responsibility attributes and investment principles, ESG investment is expected to help solve a series of problems faced in the process of China's economic structural transformation.

三、ESG Investment and pension problems

According to the seventh national census, the population aged 60 and above will account for 18.7% of the total population in 2020, an increase of 5.4 percentage points from 2010. The severe aging trend requires the society to provide a higher level of old-age security, and carrying out ESG investment can help pensions better maintain and increase their value and avoid long-term risks, which is helpful to deal with the aging problem.

(1) Theoretical mechanism

ESG investment can adapt to the unique attributes of pension funds and meet the practical needs of pension investment in three aspects. First, the risk-averse nature of pensions makes them prone to prudent investment, while ESG investment is conducive to pensions avoiding risks. Compared with traditional investment, the ESG concept requires the invested companies to undertake social responsibilities, strengthen information disclosure, and abide by due diligence codes; this enables ESG investment to integrate multiple aspects of corporate information based on various strategies, making investment more secure and scientific. The United Nations Principles for Responsible Investment advocates that if ESG factors are not considered in pension investment, it may harm the interests of pension beneficiaries. Second, the long-term nature of pensions makes them focus on the sustainability of investment companies, and ESG investment can screen out targets with long-term investment value for pensions. In addition to short-term corporate profitability and financial indicators, ESG investment and its evaluation system focus more on indicators that reflect the long-term development potential and social value of the company, which helps to select more sustainable companies and long-term investment attributes of pension funds consistent. Third, the public nature of pensions makes them focus on social utility, while ESG investment is conducive to hedging social risks. Specifically, both climate change and inequality may lead to social chaos, and the resulting long-term systemic risks will seriously affect the investment performance of pension funds. Traditional investment portfolios cannot hedge against such risks; however, ESG investments can pass the screening To help pension funds avoid the above-mentioned social risks.

(2) International practice

The ESG investment of global pension funds is jointly promoted by policy systems and market entities. Various countries have successively issued relevant laws and regulations requiring pension investment to incorporate ESG factors. For example, South Korea's 2015 amendment to the National Pension Service Act and the European Union's 2016 "Activities and Supervision of Occupational Retirement Service Institutions" both require pensions to consider ESG factors and disclose details of ESG issues. Most of the large-scale overseas pension funds attach great importance to the ESG investment philosophy. According to GSIA statistics, at the beginning of 2020, institutional investment accounted for 75% of the sustainable investment in the world's five largest markets; among them, long-term investors represented by pension funds are leaders in ESG investment. As of 2020, 89% of pension funds have Institutions said they would incorporate ESG factors into their investments. As one of the founding members of UN PRI, the Norwegian sovereign pension fund (Government Pension Fund Global, GPFG) has always adhered to the ESG investment philosophy and adopted a variety of investment strategies: through negative screening strategies, it will not comply with human rights, ethics and the environment Targets with concepts such as standards are excluded. As of 2020, a total of 184 companies have been excluded; through thematic investment strategies, sustainable thematic investments are carried out in fields such as low-carbon energy and alternative fuels, clean energy and efficiency technologies, and natural resource management. Invested companies must have more than 20% of their business in one of these areas. The Japanese Government Pension Investment Fund (GPIF) integrates ESG investment concepts into the selection of external managers. Since nearly 80% of its funds are invested by entrusting external managers, the fund sets ESG standards and increases its scoring weight to strictly select external managers who conform to the ESG investment philosophy (Zhang Feng and Wang Daopeng, 2021).

(3) Domestic practice

In recent years, in addition to promulgating overall policies on ESG investment concepts, the Chinese government has also formulated relevant guidelines for ESG investment in pension funds. For example, the 2016 "Guiding Opinions on Building a Green Financial System" proposed to encourage long-term funds such as pension funds and insurance funds to carry out green investment; the 2018 "Green Investment Guidelines (Trial)" proposed that entrusted investment management institutions for domestic and foreign pension funds should play The exemplary role of responsible investors, and actively establish a long-term mechanism in line with green investment or ESG investment norms. However, my country's current pension ESG investment has not yet been promoted. First, my country’s ESG investment market is relatively small, and the scale of pension ESG investment is even more limited. Take the social security fund as an example. As of the end of September 2021, the social security fund holds 69 of the 235 constituent stocks of the Shanghai and Shenzhen 300 ESG benchmark index, and the tradable market value accounts for only 22%. Second, the domestic ESG investment strategy is relatively single, which limits the investment options of pension funds. Different from the diversification of overseas ESG investment strategies, domestic ESG investment equity strategies are currently dominated by screening methods, including negative elimination and positive screening, resulting in fewer types of ESG investment products for pension funds. Third, the ratio of pension investment equity assets is subject to policy constraints. Equity assets and fixed-income assets in global ESG investments account for 51% and 36% respectively, but the highest proportion of equity assets allocated to various pension funds in China is only 40%.

四、ESG investment and income distribution

At present, the country is facing the problems of widening income distribution gap and prominent unbalanced and unstable economic development; this cannot be properly resolved by relying on market mechanisms, but necessary redistribution and tertiary distribution measures are needed. We believe that ESG investing can be one of the new ways to alleviate income distribution problems.

(1) Theoretical mechanism

The issue of income distribution itself has strong social attributes. Based on the requirements of social (S) elements and governance (G) elements, ESG investment can play a role in narrowing the income distribution gap from three aspects: First, ESG investment can protect low-income The rights and interests of the crowd, increasing their income. The social elements of ESG focus on issues such as human rights, modern slavery, working conditions, and employee relations, which can prompt companies to improve the conditions of workers and protect their rights and interests. ESG investment subjects can promote enterprises to determine reasonable and legal labor relations, stipulate working hours, wage standards and labor benefits, etc., provide effective protection for laborers, and increase the income of low-income people in society. Second, ESG investment can restrain the behavior of high-income groups and limit their income. The governance elements of ESG focus on issues such as bribery and corruption, executive compensation, diversity and structure of the board of directors, and require investment companies to regulate operations and pay attention to corporate governance. ESG investment can guide companies to avoid bribery and corruption, and increase the supervision and accountability of executive behavior. These measures are mainly aimed at high-income groups, and play a role in regulating legal income and cracking down on illegal income. Third, ESG investment promotes companies to participate in the three distributions. ESG investment pays attention to social welfare treatment and the concept of charity. Based on this, the selected companies are more willing to engage in public welfare and charity activities, and can participate in three distributions through donations, volunteer services and other activities. In recent years, the number of enterprises devoted to social services has been increasing, playing an active role in reducing poverty, strengthening public infrastructure and providing universal social services.

(2) International practice

First, in terms of increasing the income of low-income groups, ESG investment pays more attention to workers' wages, benefits and working environment. In 2011, the United Nations formally approved the "United Nations Guiding Principles on Business and Human Rights" (UNGPs), clearly proposing to introduce factors such as human rights, wages, forced labor and employment discrimination into ESG investment; in the same year, the Organization for Economic Co-operation and Development (OECD) updated the " The Guidelines for Multinational Enterprises provides authoritative labor standards for UNGPs, and 49 countries have officially joined it. Second, in terms of restricting the income of high-income groups, ESG investment is mainly committed to restricting the compensation of corporate executives and bribery and corruption. In 2016, UN PRI added relevant regulations on executive compensation to ESG investment; international institutional investors also linked factors such as salary and corruption to ESG investment. Third, as far as social charity is concerned, behaviors such as charitable donations and volunteer services are themselves defined as part of corporate social responsibility in early ESG practices. Take Deutsche Bank as an example. It actively participates in charity projects through ESG investment. On the one hand, it provides small donations, basic benefits, infrastructure, medical security and educational opportunities for the poor; resource support, etc.

(3) Domestic practice

In 2006, the Shenzhen Stock Exchange and the Shanghai Stock Exchange successively issued the "Guidelines for Social Responsibility of Listed Companies", which clearly stated that listed companies should protect the legitimate rights and interests of employees according to law, and promote the establishment of systems such as wages, benefits, labor safety and health, and social insurance. In 2008, Xingquan Social Responsibility Investment Fund, the first socially responsible public offering fund in China, was launched. It actively participates in charity and invests 5% of its annual fund management fee income in public welfare undertakings. In August 2021, the tenth meeting of the Central Finance and Economics Committee clearly pointed out that it is necessary to establish a basic institutional arrangement for the coordination and matching of initial distribution, redistribution, and third distribution. However, the current ESG practice of domestic companies still has a lot of shortcomings in assuming social responsibility and helping to narrow the income gap. First, the market's focus on ESG investment is focused on the environment, which may affect the overall effect of corporate social responsibility. In the context of the government's commitment to promoting carbon neutrality goals, domestic enterprises and financial institutions have given less consideration to factors related to income distribution, such as employee protection, charity, and corporate behavior. Second, the domestic ESG evaluation system is usually formulated with reference to overseas experience, and some indicators are not suitable for China's national conditions. For example, human rights indicators are valued in the international ESG evaluation system, while domestic companies place more emphasis on social security, labor welfare, etc.; Not included. Third, insufficient disclosure of ESG information makes it difficult to play a role in supervising and promoting enterprises.

五、ESG investment and climate change

In September 2020, China officially proposed the goal of striving to achieve carbon peaking by 2030 and carbon neutrality by 2060, demonstrating China's determination to achieve green and low-carbon development in the process of economic structural transformation. The environmental elements of the ESG concept include issues such as climate change, resource consumption, waste, pollution, and deforestation, which are consistent with the requirements of addressing climate change and achieving carbon neutrality.

(1) Theoretical mechanism

The promotion of ESG investment concepts and practices can help improve my country's ability and level of coping with climate change by influencing the behavior of enterprises, financial institutions, and regulatory authorities, and successfully realize the green and low-carbon transformation of the economy. First, for companies, ESG investment can help increase their investment in the field of climate change. In order to improve ESG scores, enterprises will firstly increase investment in environment and climate governance, and secondly, may increase R&D and innovation of green products. In addition, enterprises that attach importance to ESG concepts can also broaden their investment and financing channels, and realize the circular promotion of ESG practice and investment growth. Second, for financial institutions, ESG investment helps to avoid climate change risks. On the one hand, the World Economic Forum has ranked the climate issue as the top global long-term risk for three consecutive years (2019-2021); on the other hand, financial institutions can directly support enterprises in the fields of environmental protection, energy conservation and emission reduction through ESG investment , which is conducive to green and low-carbon transformation. Third, for regulators, incorporating ESG into policies and regulatory systems, formulating ESG investment norms, and improving corporate ESG investment information disclosure standards will all help promote companies to pay attention to the impact of investment and operating projects on climate change.

(2) International practice

First, international climate governance cooperation is carried out with the help of ESG investment. For example, the 21st United Nations Climate Change Conference in 2015 adopted the Paris Agreement, calling for global climate funds to invest in green energy, low-carbon economy, climate governance and other fields, and building a framework for climate change information disclosure; at the 26th United Nations Conference in 2021 At the Climate Change Conference, more than 450 financial institutions in 45 countries pledged to use the US$130 trillion assets under their management to achieve the climate governance goals of the Paris Agreement. Second, international investment institutions promote climate governance through ESG investment strategies. In September 2019, the UN-convened Net-Zero Asset Owner Alliance (AOA), convened by the UNEP Financial Initiative and the Principles for Responsible Investment (UN PRI), was established. Committed to achieving net zero carbon emissions from the properties we invest in by 2050. At present, 42 investment institutions around the world have joined the alliance, with assets under management exceeding US$4 trillion; AOA comprehensively uses ESG investment strategies and leads the industry in climate governance through investment authorization. Third, many large international companies have played a demonstration role. For example, BlackRock, as one of the largest asset management groups in the world, has formed a variety of sustainable investment portfolios by promoting climate innovation, research and analysis, and has conducted research on carbon beta tool, carbon emission There are many practices in the direction of information disclosure. As another example, Pacific Investment Management Company LLC (PIMCO), as the world's largest bond brokerage company, comprehensively uses ESG investment strategies to guide companies to pay attention to long-term climate-related risks and opportunities; at the same time, it has specially established a climate bond fund through The investment portfolio identifies green bond issuers and vigorously develops green bonds.

(3) Domestic practice

The promotion of the ESG investment concept will provide strong support for the investment and financing behavior of domestic enterprises in response to climate change. First, domestic companies have increased their ESG practices related to green and the environment. The "ESG Practice Cases of Listed Companies" released by the China Association of Listed Companies in August 2021 screened and included 133 outstanding ESG cases of listed companies. Among them, green development, climate governance and other projects are important directions for corporate ESG practice. However, as mentioned above, ESG practice still faces the problem of insufficient information disclosure. However, the Ministry of Ecology and Environmental Protection has successively issued documents this year to promote the disclosure of corporate environmental information, and proposed to basically form a mandatory environmental information disclosure system by 2025. Second, financial institutions actively participate in ESG investment. On the one hand, financial institutions have accelerated the development of ESG investment products since the carbon neutral goal was put forward; from 2020 to 2021, the scale of pan-ESG funds has increased significantly, and the proportion of green, environmental protection, carbon neutral and other themes is relatively high; On the one hand, the National Council for Social Security Fund also stated externally that it will play a more active leading role in actively promoting ESG concepts and practicing ESG investments. The main obstacle at present is the lack of professional and unified green rating certification, which makes institutions only identify green products through individual stocks, which is very inefficient. Third, regulators have introduced a series of policies to promote the development of green finance and ESG investment. Since 2021, the regulatory authorities have unified the catalog of green bond projects, incorporated the "dual carbon" policy into the "14th Five-Year Plan", and introduced the "dual carbon" top-level design and carbon peak action plan. Since 2006 when the Shanghai and Shenzhen Stock Exchanges required listed companies to regularly evaluate their performance of corporate social responsibilities in the “Guidelines on Responsibility of Listed Companies,” regulators have successively issued documents to establish the basic framework for ESG information disclosure. However, there are currently no policy guidelines or regulations specifically formulated for ESG investment, and there is also a lack of strong incentives and support measures.

六、Conclusions and policy recommendations

The unique social responsibility attributes and investment principles of ESG investment are expected to help solve a series of problems in China's economic structural transformation. Based on the previous analysis, we put forward the following suggestions for promoting the development of domestic ESG investment: First, formulate top-level guidance policies for ESG investment. Regulatory authorities should issue top-level ESG investment guidelines as soon as possible, so that institutions can follow rules when participating in ESG investment. In the future, the pension ESG investment management system should also be revised and improved, and ESG factors should be formally incorporated into the pension investment decision-making framework. Second, build a unified and complete domestic ESG evaluation system. A unified, sound, scientific and rigorous ESG evaluation system should be established as soon as possible. In addition, the ESG evaluation system should be properly adjusted to suit China's national conditions. For example, factors such as energy consumption, carbon emissions, and carbon footprint under the goal of carbon neutrality are introduced into environmental factors, and factors such as inclusive finance and rural revitalization are added to social and governance factors. Third, accelerate the improvement of the ESG information disclosure system. In the future, the government and regulatory authorities should take the lead and drive enterprises and social organizations to work together to issue unified and clear ESG information disclosure standards, increase the supervision of ESG information disclosure, and improve the efficiency and quality of ESG information disclosure. Fourth, promote the construction of diversified ESG investment strategies and product systems. In the future, financial institutions should accelerate the improvement of ESG investment strategies and product system construction: First, comprehensively use diversified investment strategies such as ESG integration, thematic investment, and negative elimination, and develop ESG investment products with different strategies; In the case of the main situation, accelerate the development of passive standardized fund products such as index funds and ETFs to match the diversified ESG investment needs.

Source of the article: Research on Carbon Neutrality and Carbon Peaking Strategy

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