Why China is missing out on trillions in sustainable investment

Every Thursday at 9 p.m. for the past two years, about a dozen Chinese finance veterans and regulators have held a video call to talk about pushing the nation's companies to meet environmental, social and governance standards. This was supposed to be the year their efforts paid off.

ESG investing deploys more than $30 trillion worldwide, but the vast majority of Chinese companies don't report enough data to show whether they qualify for the funds. Officials have said they'll make it mandatory this year for the nearly 4,000 listed companies in the country to publish ESG metrics, potentially attracting trillions more into the country.

"After years of laying the foundations, we hope 2020 will be the year that ESG investing takes off in China," said Angela Bai, executive director of the China Alliance of Social Value Investment, which established the Thursday meetings.

But with companies struggling to overcome the economic effects of the coronavirus pandemic and a trade war with the U.S., that may be optimistic. Even before the pandemic, stock exchange officials told Bloomberg News in November that regulators had yet to give them guidelines on how companies should report ESG metrics. The Shenzhen exchange said last week it has no new information to disclose on the progress of mandatory disclosure. The Shanghai exchange did not respond to questions about the proposed changes.

The impact of the virus has taken precedence over issues such as sustainable investing, said Helena Fung, head of sustainable investment in Asia-Pacific at FTSE Russell. "Investors will be watching closely to see whether a mandatory reporting framework will be sufficiently robust to increase reporting standards," she said.

Without enforced rules, most companies don't think the benefits of being able to tap ESG funding justify the extra work. China's stock markets are dominated by retail investors who are used to wild swings and typically seek fast returns, especially from new listings. That means companies have been able to raise funds without having to publish information about sustainability.

"Many companies simply aren't aware of the benefits of disclosure and don't see why they should take on the extra cost," said Guo Peiyuan, chairman of SynTao Green Finance, a Beijing-based ESG data provider.

An ESG investing model developed by CASVI outperformed China's benchmark index by over 4 percentage points annually over a five-year period, but in a market where funds can outperform the market several times over in the short term, steadiness is not always an easy sell.

Chinese investors also aren't used to thinking about profit and social value together, said Wang Deying, deputy general manager of Bosera Funds, which worked with CASVI to create a sustainable-investing exchange-traded fund that raised nearly 1.5 billion yuan ($212 million) in January.

Bosera's ETF found an audience with some of China's largest banks and insurers, but it will take time for more investors to come around, Mr. Wang said. "People are used to making a profit, then using some of those profits to support social causes, not putting the two together in one decision."

While the Chinese government has been a strong proponent of impact investing, turning the nation into the world's biggest issuer of green bonds, it has lagged behind Asian counterparts like Japan and Australia in establishing a framework for firms to report ESG data. By June 2019, only 0.13% of the more than 13 trillion yuan in mutual fund assets under management in China were ESG funds, according to data compiled by CASVI.

"Data availability and accuracy have been a big challenge," Ms. Bai said. "We initially wanted to evaluate all Chinese listed companies, but it was basically impossible."

Instead, CASVI limited its model to the benchmark CSI 300 index of mostly large-cap firms. Even there, discrepancies still emerge after cross-checking company data with authorities such as the patent office and Environmental Protection Bureau, or non-profits like the Institute of Public and Environmental Affairs, Ms. Bai said. Often data is released by companies in the form of shiny "corporate responsibility reports" instead of statements that are subject to regulatory scrutiny.

CASVI, one of the first non-profits in China to advocate for ESG investing, also has to navigate a complicated relationship with the government and powerful state-run companies, according to Ms. Bai. The organization has rejected explicit government support, and, while CASVI's model ranks companies on the CSI300 from best to worst, its report only includes the names of the top 99 to avoid publicly shaming those who underperform.

But pressure is growing for more robust reporting, especially after Chinese shares were added to global indexes compiled by MSCI Inc. and FTSE Russell, which also rates companies based on ESG metrics.

Solar power company LONGi Green Energy Technology Co. said it started to publish more ESG measures after a poor rating from MSCI Inc., which gave the firm a score of zero for categories for which they did not disclose data.

There are now 45 funds and service providers in China that have formally adopted the Principles for Responsible Investment, up from six three years ago. A recent joint report by PRI and the CFA Institute found Chinese asset managers are increasingly incorporating ESG factors in their investment analysis and that overseas demand has been a major driver for the sector.

"People are clearly becoming more passionate about the concept," Ms. Bai said.