Sustainable investments: Western and Chinese paths

Editor's note: Wang Jianhui is the general manager of the Research and Development Department at Capital Securities. The article reflects the author's opinions and not necessarily the views of CGTN.

Since the beginning of the new millennium, sustainable investment, often interchangeably referred to as "Environmental, Social, Governance (ESG) investment," has increasingly become an important factor for institutions when assessing investment value and related decision-making. The popularity of this relatively new investment concept has grown exponentially during the last several years, reflected both in terms of the number of funds and asset volume under management.

According to the Global Sustainable Fund Flows: Q3 2023 in Review by Morningstar, there are 7,648 ESG equity funds globally, with their value reaching $2.74 trillion at the end of September, up from $1.7 trillion in 2020, despite a fall in stock valuations by 4.2 percent this year in this category. So far, sustainable equity funds account for 2.8 percent of the $98 trillion worth of total assets under management, according to Global Asset Management 2023 by Boston Consulting Group. Adding green bond financing, the share of sustainable investment in the global capital market will exceed 16 percent or $35.3 trillion, according to UNSTAD's World Investment Report 2020-2021.

Even if some of the fund products are just "self-labeled", the statistics mentioned above do indicate a solid growth trend, and the fact that more and more institutional investors are not only looking for companies that make money, but those who could do it in the right way. They deserve some applause for their responsibilities and patience since such investments do not make a big difference compared to the traditional ones. MSCI Europe ESG Leaders Index, for example, performed even a little worse at 16.78 and -16.91 percent than MSCI Europe, the benchmark, which recorded 16.97 and -14.53 percent, in 2021 and 2022 respectively. The situation in Hong Kong SAR is slightly better, where the Heng Seng ESG index has accumulated a loss of 26.5 percent since its inception in 2014, compared to a fall of 33 percent of the Heng Seng Index.

China has quickly engaged itself in sustainable investment over the years. According to the Morningstar report, China is the third largest market after Europe and the U.S. By the end of 2022, there were 624 ESG funds with an asset value of 518.2 billion yuan under management, accounting for 2 percent of the total local fund arena, according to China SIF Report 2022. Fund managers in China have similarly mixed performance compared to their international peers. Zhongzheng ESG 100 index is currently 17.6 percent higher than at its inception, but down by 6.7 percent during the last three years. Meanwhile, the overall Shanghai Composite Index is up by 46.8 percent but down by 9.6 percent in the comparable periods.

The 250-day standard deviation, a measure of price fluctuations, is 13.7 percent with the ESG index and 11.7 percent with the benchmark, suggesting a slightly higher risk for the former. One possible explanation for these rather unexpected results is that the ESG index, like its peers abroad, mainly consists of traditional industry leaders, of which 50 are from the manufacturing sector, 21 are from the financial industry, and only six are from high-tech areas. Besides, the relative small size of the funds, with an average of 830 million yuan per fund, and possibly related efficiency problems could be another reason for the lukewarm performance. Lack of unified standards for ESG is also a negative factor. Quite often, the same company would end up having different ESG ratings. For example, WuLiangYe has 6 ESG ratings ranging from AAA to CCC. As a result, ESG investment turned out to be not attractive enough for most fund investors.

Although China is the second largest green bond market, with outstanding value of such bonds reaching 1.98 trillion yuan, 30 percent higher than that in 2021, the combined volume of equity and bond financing only accounts for 1.8 percent of the local capital market. The country has already committed to peaking carbon dioxide emissions before 2030 and achieving carbon neutrality before 2060. It does not want to wait for the capital market to pick up, so it has come up with a more immediate solution, green credit loans. This is viable thanks to the industry's sound capital adequacy and provision coverage ratio, 14.77 percent and 207.89 percent respectively by the end of the third quarter, and the relatively low non-performing ratio of 1.61 percent. By the end of September 2023, outstanding green credit loans increased by 36.8 percent year-on-year to 28.58 trillion yuan ($3.97 trillion) or 12.2 percent of the total bank loans, making China the largest green credit market in the world. Due to government subsidies, banks can offer green credit at a rate that is 10-15 basis points lower, which translates to financing cost savings of 30-40 billion yuan each year for borrowers.