Top 10 Trends in Responsible Investment in China 2022

The 2030 carbon peak and 2060 carbon neutrality targets will drive the overall green transition of China's economic and social development. By the end of 2021, the "1+N" policy system for realizing carbon targets has taken shape, making the transition path increasingly clear. ESG and green finance cover a much broader scope than carbon, while the latter is obviously the hot spot for the time being. We expect that carbon targets will direct the development of ESG and green finance in 2022, in that, they become the primary designated goals to be served by green finance policies and products. They will also be given priority in the ESG space including disclosure and investing. Following the first year of smooth operation, Chinese national carbon trading market is likely to expand and bring in more pilot industries in the coming years.

Specifically, ESG and green finance will contribute to carbon targets in two ways. First is climate financing. In 2022, China will launch first local pilot cities for climate financing to explore various implementation paths and models. Second is risk prevention,  to quantify the effectively manage the systemic financial risks in the transition process. In addition, social risks and harmonious transition will also receive more attention.

Regulators have increasingly employed policy instruments to motivate financial institutions to allocate capital to green assets. In 2018, the People’s Bank of China (PBoC) took on eligible green assets as medium-term lending facilities (MLF) collaterals; in 2020, the Ministry of Finance (MoF) incorporated the green credit criteria into commercial banks' performance evaluation. In mid-2021, the green finance evaluation results were taken into account when the central bank’s rating framework for financial institutions and their prudential management. At the end of 2021, the PBoC launched a carbon reduction facility and a special re-financing facility for clean coal, providing financial support at an interest rate of 1.75% for eligible projects. We expect that these instruments effectively incentivize financial institutions to allocate capital to green assets, especially green loans and green bonds in 2022.

Local governments will introduce more policies to support green finance, including incentive policies for local financial institutions, especially in green finance pilot zones and in Beijing, Shanghai and Shenzhen. For example, in 2022, Shenzhen will announce the second batch of certified green financial institutions. These institutions have to meet specific requirements for the size and growth rate of green assets.

Driven by multiple factors, the scale of China's ESG and green finance market has grown rapidly in 2021. The green credit balance increased by more than RMB 2 trillion compared to the previous year, and the size of both ESG mutual funds and green bonds has more than doubled. We expect that the growth rate of China's ESG and green finance markets remains high in 2022, with the overall size exceeding RMB 20 trillion provided that no systemic shocks happen in the financial market. The significant growth in market size implies that ESG and green finance will become the new focus for mainstream financial institutions. Various featured ESG and green finance products will emerge. For example, leading asset management firms will further explore and practice ESG investment strategies such as engagement and stewardship.

Transition finance will become an essential part of the substantial growth as a large number of assets have to be decarbonized and to go through the transition process from "not green" to "green" and from "light green" to "dark green". We expect that more consensus will be reached regarding the concept, standards, classification and regulatory framework of transition finance in the Chinese market in 2022.

In May 2021, the Insurance Asset Management Association of China (IAMAC), together with its member institutions, issued the China Insurance Asset Management Industry Initiative to Support Carbon Targets, encouraging insurance assets to invest in green. The scale of insurance assets invested in the green sector in 2021 does increase and reaches about RMB 1 trillion, doubling year on year. We expect this trend to continue in 2022, and the IAMAC ESG Expert Committee established at the end of 2021 will also facilitate such growth. It is reported that the regulators are working on the Guidelines for ESG Investment by Insurance Assets, which is expected to be published in 2022. This will become another positive driver, in particular, if such guidelines can include incentives of reducing risk weight for ESG investment.  

In addition to insurance, other long-term funds in China will also incorporate the concept of ESG investment to varying degrees. The China Investment Corporation (CIC) has issued its Sustainable Investment Policy, and more specific initiatives are expected to come. Pension funds are also paying more attention to ESG investing. The ESG topic has become the theme of the China Pension Development Report 2021.

In July 2021, China implemented a new version of Green Bond Endorsed Projects Catalogue (2021 Edition), which eliminated coal and promoted the alignment of China's green bond standards with international standards. In November 2021, the release of the Sustainable Finance Common Ground Taxonomy - Climate Change Mitigation also further aligned green finance standards in China and abroad. Prepared by the working group of the International Platform for Sustainable Finance (IPSF), the Common Ground Taxonomy provides a detailed comparative analysis of the methodologies and results of the Chinese and European green and sustainable finance taxonomy, incorporating a list of economic activities that are commonly recognized in both markets and that contribute significantly to climate change mitigation. This is of great significance in promoting China-EU green finance collaboration, encouraging cross-border climate financing activities, and reducing the cost of cross-border green asset verifications. We expect this move to effectively promote the bilateral flow of green assets between China and Europe and benefit the furthering opening of the green bond market, especially for Chinese issuers to issue green bonds abroad.

2022 will be the first year of the market-based assessment for green bond verifiers in China. Meanwhile, the China Green Bond Principles is under development by China’s Green Bond Standard Committee, and are expected to be released this year. All these initiatives will further improve the regulation system of China's green bond market.

Despite the turmoil in international relations, China still adheres to multilateralism, solidarity and cooperation, and sustainable development has become the area with the highest consensus between China and the Western countries. Meanwhile, international cooperation is also one of the "five pillars" of China's green finance policy system. With this background, international cooperation in ESG and green finance is still a major trend, which will help China continue its opening-up of the financial market. We expect that climate change, biodiversity, and the Belt and Road Initiative will continue to be key themes for international cooperation; the UN, World Bank, G20, Central Banks and Supervisors Network for Greening the Financial System (NGFS), and IPSF will be important platforms for international cooperation; more Chinese financial institutions will sign up the Principles for Responsible Banking (PRB), Principles for Responsible Investment (PRI), and support the TCFD.

At the same time, conflicts are unavoidable with divergent opinions between China and foreign countries in ESG and green finance. Such conflicts may continue to exist in areas like fo*ssil fuels, traditional Chinese medicines and responsible supply chain. This will attract more attentions from regulators and industry associations in China who will probably start to factor Chinese characteristics into ESG criteria.

The rapid development of ESG investing has directly stimulated the surge of market demands for ESG talents. All kinds of institutions in the market, including banks, insurance, buy side, sell side, intermediaries are actively recruiting ESG talents. However, the supply of ESG talents is limited and new talents entering the market are even less. This results in ESG talents with certain experience being more sought after. The headhunting business for ESG talents would grow significantly. In addition to recruiting new talent, the demand for internal ESG training is also increasing, especially in departments of investment research, market communication and client relationship. Their needs are still basically focusing on ESG investing rationale, status quo, and policy trends.

We expect that the growing demands will stimulate the market supplies. In the short term, the supply will come from training institutes and consulting firms in the market. Most of the trainings will be customized. ESG certificate training will also emerge. In the long-run, universities and business schools will play significant roles by offering ESG-related courses and even degree program in the coming years.

The boom of the ESG market can be a mixed bag. The risk of greenwashing has gradually increased. Some financial institutions label their financial products as ESG and green finance products without any R&D support. Regulators and investors in the European market have taken notice of this issue and introduced the Sustainable Financial Disclosure Regulation (SFDR), which imposes disclosure requirements at institution level and product level, with provisions in the regulation to be implemented in 2021 and 2022 in two phases. The Hong Kong Securities and Futures Commission has introduced similar regulations, which will come into effect in 2022.

Regulators in Mainland China are also paying close attention to this and try to manage greenwashing risks. For example, the PBoC emphasized the requirement of "practical, calculable and verifiable" when launching the carbon reduction facility; in January 2022, the NAFMII issued a document to strengthen the disclosure of green financial bonds. We expect regulators to further strengthen anti-greenwashing measures in 2022, especially requiring financial institutions to explain the product logic and management framework. Strengthening information disclosure and introducing third-party verification will become the most commonly seen approaches by regulators and market practitioners.

Financial institutions will become the key sector for environmental information disclosure. In 2021, the PBoC issued a number of regulatory documents, such as Environmental Information Disclosure Guidelines for Financial Institutions, Work Plan for Promoting Environmental Information Disclosure by Financial Institutions in Green Finance Pilot Zones, Operation Manual for Environmental Information Disclosure for Banks (Trial Version) and Technical Guidelines for Carbon Accounting by Financial Institutions (Trial Version), to guide financial institutions to compile environmental reports and explore carbon accounting. 2022 will be the year of full implementation and result assessment to accumulate experiences. Therefore, we expect more financial institutions to release environmental information disclosure reports or TCFD reports in 2022. These institutions will mainly come from the Green Finance Pilot Zones, Beijing, Shanghai and the Greater Bay Area.

Commercial banks will start to explore climate stress testing. In 2021, the PBoC has organized some banks to conduct pilot tests, and it is likely that, based on such experiences, stress testing standards and methodologies will be developed. The pilot scope will be gradually expanded to other banks and financial institutions. Meanwhile, some financial institutions will also carry out climate stress testing voluntarily for business development purpose.

The Ministry of Ecology and Environment (MEE) is actively implementing policies to strengthen corporate environmental disclosure, with management measures released at the end of 2021 and format guidelines released in January 2022. According to the requirements, listed companies and bond issuers that have committed environmental violations are required to disclose environmental information on a mandatory basis. In other words, this means that not all listed companies will be required to do so, which is consistent with the attitude of the China Securities Regulatory Commission (CSRC) who advocates a voluntary rather than mandatory approach. Nevertheless, more disclosure policies are coming: the Shanghai and Shenzhen Stock Exchanges updated their listing rules in January 2022, reiterating that listed companies "shall disclose social responsibility reports (CSR reports) in accordance with the regulations"; later, the Shanghai Stock Exchange further required the constituent companies of the Sci-Tech 50 Index to report mandatorily. In addition, the revised draft of the Company Act also proposed that companies are encouraged to "publish social responsibility reports". It is quite likely that publishing CSR or ESG reports will become a common practice for listed companies and large enterprises in China.

Internationally, the International Financial Reporting Standards (IFRS) Foundation announced the establishment of the International Sustainability Standards Board (ISSB) at the end of 2021, which intends to develop a comprehensive set of global benchmark standards for high-quality sustainable disclosure. ISSB will start its work formally under the newly established leadership in 2022, which attracts attentions globally. We expect that China will participate in and support ISSB’s work actively.