China’s renewable finance and investment management case study
Renewable finance and green investments have been growing fast in China. It is estimated that the new “ecological civilisation” transformations of China which are included in their 13th Five-Year Plan would require new green finance and investments of between USD474 billion and USD633 billion in the period 2015-2030. Experts have forecasted that the central government of the PRC would only provide some 15% government seed green investments. At least 85% of the planned green finance and investments for China would then have to come from the private sector. Green finance and green bonds have been growing steadily in China. The concepts of ESG (environmental, social and corporate governance), TCFD and impact investment are also being increasingly accepted and supported by the PRC government, regulators, financial institutions and listed companies. The key developments and outlooks in these areas will be discussed in more detail below with business examples.
PRC commercial banks have been active in green finance in China especially through their green credit business. In 2018, the total balance of green credits in China has exceeded RMB9 trillion or USD1.3 trillion. Looking ahead, it is expected that China’s growth trends in green finance will continue for the foreseeable future. The total balance of green credit in China is expected to surpass RMB10 trillion or USD1.5 trillion by the end of 2019. Furthermore, there are important policy discussions on whether the risk weighting of green assets can be or should be reduced. These are being closely watched by commercial banks as any breakthroughs in this area would be a strong incentive for green credit business growths.
The green bond market in China has been growing well. In 2018, China’s green bond market issued more than 120 labelled green bonds worth around RMB220 billion or USD32.6 billion. China’s green bond market has so far still remained a small share of the overall China’s bond market. There are challenges on motivating issuers and investors plus market scale up challenges in China. Looking ahead, it is expected that an increasing number of green asset-backed securities and infrastructure green bonds would be issued in 2019-2020. In addition, there will be further regulations of the green bond market in China. The China Green Bond Standard Committee was established in December 2018 under the guidance of the People’s Bank of China (PBOC), the CSRC and other financial regulators. The committee has been chaired by the National Association of Financial Market Institutional Investors (NAFMII). This committee is China’s first self-regulatory and coordination mechanism for green bonds. It is expected to propose, in the near future, the harmonisation of green bond standards and market access of green bond verifiers. The second edition of the Green Bond Endorsed Project Catalogue, which has been discussed for a long time, is planned to be released later in 2019/2020. The requirements for qualifications, technical standards and self-regulation of verifiers which have been set out in the Guidelines for the Assessment and Certification of Green Bonds (Interim) will also be implemented in stages in 2019. These further regulating of China’s green bond market should improve its transparency and raise market confidence (Guo, SynTao, Responsible Investment, 2019).
Green finance and investments have also been growing at the local government and provincial levels in China. Local government and provincial administrative regions had been releasing various green finance policies, which covered green bonds, green credit, green equities, green insurance, green development funds, environmental finance, etc. In 2018, the number of green finance policies implemented in the provincial, prefectural and municipal administrative region levels had increased by over 68%. The number of local policies which had clear quantitative criteria for financial incentives has also increased and had accounted for over 13% of all policies. Looking ahead, it is expected that more local governments would be adopting green finance and more local green finance policies. In 2019, it is anticipated that local governments will continue to issue more new policies to support the development of green finance and renewable investments. These should include new municipal policies, facilitative measures, substantive financial incentives, regulated standards, quantifying assessments, etc. These should help to deepen green finance and renewable investment developments, especially at the green finance pilot zones in leading provinces.
Green finance and sustainable renewable investments have also been important parts of the large China’s Belt and Road Initiative (BRI). These have attracted considerable investments to date and are expected to rise in future. Since the launch of the Belt and Road Initiative, the international community has been closely following the environmental and social implications of various Belt and Road investments. In November 2018, the Green Finance Committee (GFC) of the China Society for Finance and Banking and the UK City of London jointly released the Green Investment Principles for the Belt & Road Initiative. It advocated the incorporation of sustainability principles in asset classes, financial products, project implementation, management of
Renewable finance and investment management 155 participating agencies and other management processes. These principles have been endorsed by many large financial institutions and enterprises in China and globally. It is anticipated that these green investment principles will play important roles in making various BRI investments more sustainable and environmental friendly. Chinese and international financial institutions will be closely following these principles. These should encourage better management of the environmental and sustainability risks of the Belt and Road investments in China and globally.
In context to international green finance co-operations, China has been continuously enhancing possible international co-operations on green finance and sustainable investments with leading financial regulators and institutions globally. China has carried out bilateral and multilateral co-operation and pilot programmes with the UK, France, Germany, Luxembourg and other countries. These covered green finance fields such as financial regulation, green bonds, information, disclosure, etc. A good example is the UK-China pilot on G20 Taskforce on Climate-Related Finance Disclosures (TCFD). Looking ahead, the trend of international co-operation will continue in the foreseeable future with active participations by leading financial institutions in China and overseas.
In relation to FinTech, there are rising fintech applications in green financing and renewable investments. In July 2018, the G20 Sustainable Finance Study Group discussed fintech’s potential in promoting sustainable financial developments in its 2018 Sustainable Finance Synthesis Report. Potential fintech applications included providing more abundant, accurate and effective data through cheaper and faster means; reducing search cost, improving the pricing of ESG risks and opportunity cost; optimising the measurement, recording and verification of sustainability indicators; offering sustainable financing in a more creative and inclusive way; etc. With the strong growth of internet and IT companies in China, there is also strong growth of fintech technologies in China. Looking ahead, it is anticipated that fintech companies will increasingly apply new fintech technology to support the growth of green inclusive financing and ethnical impact investments, especially in how to combine it with poverty reductions in China (G20 Sustainable Finance Synthesis Report, 2018).
In context to ESG, China is expected to issue its official ESG reporting guidelines soon. China is likely to, in line with the general deployment of the Guidelines for Establishing a Green Financial System, make it mandatory for all their listed companies to disclose their environmental information by 2020. In September 2018, the China Securities Regulatory Commission (CSRC) has, in its revised Corporate Governance Code for Listed Companies, established an environmental, social and corporate governance (ESG) information disclosure framework for listed companies. In October 2018, the Shanghai Stock Exchange (SSE) has supported the World Federation of Exchanges (WFE) in developing the Principles for Sustainable Exchanges, which recommended leading stock exchanges globally to issue ESG disclosure guidance. Looking ahead, it is likely that China will issue the ESG reporting guidelines for the A-share market in 2019. This will in turn push the Chinese listed companies to improveand upgrade their Corporate Social Responsibility (CSR) Reports into new ESG reports with significant improvements in material and quantitative reporting of environment, social and governance aspects (Guo, SynTao, 2019).
In context to TCFD, China has been cooperating well with the UK City of London Green Finance Team on important TCFD pilots. The UK-China Climate and Environmental Information Disclosure Pilot project which involved ten China financial institutions together with the UK City of London Green Finance Team was started in 2018. The pilot project has been progressing well and would be entering its second stage in 2019. This should encourage more Chinese financial institutions especially commercial banks to improve their accounting and disclosure of environmental information relating to their asset portfolios. It should also promote the Chinese listed companies to improve the disclosure of their environmental and climate information.
Leading banks in China have also been discussing their draft Principles for Responsible Banking and are expected to endorse these draft principles soon. At the UNEP Finance Initiative (UNEP FI) Global Roundtable and the Sixth China SIF annual conference at the end of 2018, the draft Principles for Responsible Banking was officially released for consultation with both English and Chinese versions. The draft principles provided banks in China with a consistent framework incorporating sustainable development elements in their strategic, investment portfolio plus in transaction levels and in all business areas. Looking ahead, it is anticipated that these new principles will be supported by the Chinese regulators, banking industry associations and leading Chinese banks in the foreseeable future. The Industrial and Commercial Bank of China (ICBC) has been a core working group member and will likely be one of first banks in China to endorse the new Responsible Banking Principles, probably in 2019/2020 (UNEP-FI, Responsible Banking Principles, 2018).
For mutual funds, ESG has been playing important roles in the Chinese mutual fund market. More ESG-themed mutual fund products are expected to be launched in China. At the end of 2018, the Asset Management Association of China (AMAC) released its draft Guidelines for Green Investment. The AMAC had advised that ESG is an important emerging investment strategy in the global asset management industry. ESG is also an important initiative for the investment fund industry in China to implement as part of its aspiration to establish a sustainable, green financial system in China. The AMAC will be facilitating the implementation of the Guidelines across China. In 2018, several Chinese mutual funds have also joined the UN-supported Principles for Responsible Investment (PRI) which would motivate these mutual funds to develop more ESG investment products. Looking ahead, it is anticipated that more Chinese funds will be adopting ESG investment strategies in 2019-2020 and they will be introducing more ESG-themed mutual fund products. The China Securities Index Co. Ltd (CSI) and the MSCI are also expected to launch more ESG-themed indices in 2019-2020. These ESG-themed mutual fund products should enable Chinese investors to have more channels to directly participate in responsible investment and green finance. In addition, the public sale of mutual fund products should
Renewable finance and investment management 157 improve the education and dissemination of ethnical investment knowledge amongst investors and general public in China.
For insurance funds, ESG has been playing important roles in their investment approaches as long-term asset owners. ESG and responsible investments with long-term values fit in well with the investment approaches of long-term assets owners, such as insurance and pension funds. The Chinese insurance regulator has also been encouraging insurance funds in China to increase the proportion of high-quality listed companies in their portfolios. Looking ahead, it is expected that insurance funds will be paying more attention to their ESG strategies in 2019 plus to minimise their investment risks with secure mid-and longterm stable returns. China Life Asset Management Company Limited and China Ping An, the giant Chinese insurer, have both become signatories to the UN Principles for Responsible Investment (UN PRI) in 2018 and 2019 respectively. Looking ahead, these should encourage more insurance asset management institutions in China to recognise and endorse UN PRI. Insurance companies are likely to issue more ESG green insurance products in future (UN PRI, 2019).
As far as Social Security is concerned, the China National Social Security Fund (NSSF) has said that it will have a closer look at the ESG and TCFD principles. It is anticipated that NSSF will be including the new ESG and TCFD principles when it selects which fund managers to manage its investments in 2019-2020. This should then stimulate more mutual funds and fund managers to adopt ESG and TCFD.
Charities in China are also likely to endorse the new ESG and TCFD principles. The PRC’s Ministry of Civil Affairs has promulgated the Interim Measures for the Administration of Investment Activities of Charitable Organizations for Value Preservation and Appreciation in 2018. Charitable organisations in China would be allowed to entrust their assets to professional asset management firms for investment purpose if such investment will not violate their missions or damage their reputation. It is anticipated that charitable organisations will take steps to introduce new responsible investment concepts including ESG and TCFD principles (PRC Ministry of Civil Affairs, 2018).
Chinese PE and VC funds have also started to look into ESG and TCFD integrations. Many PE and VC investment funds have started to systematically incorporate ESG into their investments to minimise risks. The AMAC has stated for the first time, in its draft Guidelines for Green Investment, that private equity funds may reference the green investment concept. The G20 Sustainable Finance Study Group also identified the development of sustainable PE and VC funds as key research areas. Currently, Chinese domestic PE and VC companies, including CITIC Private Equity Funds Management, Hony Capital and Sequoia Capital China, have already made ESG investment trials. Looking ahead, investment strategies in line with ESG principles should enhance the robustness of target companies or projects, whilst reducing risks posed to PE and VC investors. More PE and VC funds are expected to incorporate ESG into the whole process of project screening, due diligence, investment decision-making, post-investment management and even exit strategy.
The rising public interest in environment and climate change plus the rising litigation risks should also promote ESG and TCFD adaptation in China. In 2018, China has introduced a nationwide environmental damage compensation system on a pilot basis. These have helped to lay the groundworks for environmental public interest litigations, which used to be difficult during the early stage of the implementation of the new Environmental Protection Law. In 2018, environmental and resource protection cases had accounted for more than half of 90,000 public interest litigations initiated by prosecutorial authorities all over China. Looking ahead, it is anticipated that in future more environmental public interest litigations cases will be entering judicial proceedings in China. The retrospective effects plus joint and several liabilities of such litigations will be extended to financial institutions, especially some commercial banks which have business linkages with polluting enterprises.
A good litigation example in China is that in 2018 the Green Garden Environmental Friendliness Center brought a lawsuit against Xiangda Agricultural & Animal Husbandry Co. Ltd. for polluting the Hanjiang River. It has also applied to have two commercial banks in China that had provided bank loans to the defendant to be named as co-defendants (China Water Risk, Top 10 Responsible Investment Trends for 2019 In China, China 18 March 2019).
In January 2019, the Supreme People’s Procuratorate in China and other nine national agencies issued the Opinions on Enhancing Cooperation and Coordination in the Prosecution of Public-Interest Litigations to Legally Fight against Pollution. This is expected to address many challenges in environmental litigation practices in China. With the improvement of these legal systems in China, various financial institutions, including commercial banks, will be confronted with a greater risk of environmental public interest litigations. Hence, it is very important that companies should urgently consider and adopt the new ESG and TCFD principles. In addition, the corporate legal departments should be better prepared for increased risks of litigation in China in future (PRC Supreme People’s Procuratorate, 2019).
