Agnes, thank you so much for joining this conversation. Before we start, we would love to learn more about you and your impressive career. What motivated you to become a sustainable investor?
The movie “An Inconvenient Truth” convinced me that we needed to do something about climate change. It reinforced my chosen mission to help make the world a better place.
Soon after, I went to Shanghai and Hong Kong to manage investment risk for a large family office. In between, I started my own company to help our own family and professional investors make renewable and cleantech investments. Through training facilitation, speaking engagements and publications, I advocate for ESG and sustainable investing. This is the area of research in my current PhD studies, a welcome challenge after four decades working in global financial markets.
I joined Yaozhi Asset Management International this May. We are the global-facing arm of the Yaozhi Asset Management Company in Shanghai, a registered member of the China Asset Management Association. I presented the case for becoming a PRI signatory and ESG-investing – we strive to be the first indigenous China/Hong Kong asset manager to offer a differentiated Greater China ESG fund for institutional and professional investors.
What do you think is driving China’s emergence as a leader in ESG advocacy? Which driver - performance, demand, policy - is the strongest driver of ESG adoption in China?
Taking a step back, China saw the launch of its first “ESG fund” in 2006 and has since seen over forty organizations launch ESG-themed funds, with the more recent products deemed as true ESG offerings. China is one of the PRI’s fastest growing markets with nearly fifty signatories , and one of the top three issuers of green bonds in the last three years. China’s cumulative issuance of USD200 billion represents a quarter of all issuance by the end of 2019 .
How? An influential central authority determined to meet climate goals and align Chinese climate finance standards with global standards has been the primary driver of rapid ESG adoption in China. The government has committed to the Paris Agreement and is actively transitioning the economy for “peak carbon” by 2030.
So far, policymakers have enacted over 100 green finance policies to promote both the advocacy and practice of ESG investing. The China Securities Regulatory Commission (China’s SEC) requires ESG disclosure from all listed equity and bond issuers by 2020. The recent Greater Bay Area (Guangdong, Hong Kong, Macau) initiative further emphasizes the significance of green finance.
Beginning this summer, Hong Kong requires all exchange-listed companies to produce a statement setting out the board’s consideration of ESG risks and climate change impact on their businesses. I’m glad that the Hong Kong Exchange updated the IPO guidance in late July to ensure ESG mechanisms are built into the listing process .
In addition, investors and asset managers have become a stronger voice on ESG over the last twelve months. I’m seeing the investment community gain more conviction that demand for ESG strategies is real, and that performance is not sacrificed as a tradeoff. While corporate governance “G” remains an overarching concern, company performance related to “E” and “S” risks are given increasing attention.
For one, I’m curious to learn what share of assets under management in China’s National Social Security Fund (NSSF) represent strategic allocations to ESG mandates, with its Japanese counterpart, the Government Pension Investment Fund (GPIF), leading the charge for Asian sovereign wealth funds four years ago .
How can asset managers position their organizations to capture this trend? Which capabilities (e.g. talent, product, data) are most challenged?
I hear a lot of complaints about data from the investment community, but let me refocus. I would argue that even more influential to creating ESG opportunities is having all the players in the ecosystems aligned and motivated to play their part, especially asset owners which make allocation decisions.
I have the privilege of being in family offices and asset managers that stretch across Hong Kong and China, as well as facilitating ESG training at the Hong Kong Institute of Directors (HKIoD). As a result, I meet many board members at different stages of implementing ESG practices into their operations and asset managers who are variably skilled in ESG integration into their investments. I see a good part of the entire value chain. After industry policy removes initial inertia, asset owners must be convinced and motivated to allocate based on ESG objectives in order to propel asset managers to train talents and develop products in this important space.
Beyond asset owner alignment, my view on data is that we do have a shortage of deep coverage on Greater China.
Most of the ESG data providers I have spoken with cover between 150 to 500 Hong Kong large cap stocks in their database. Most of them share a similar approach whereby analysts deploy proprietary methodology largely on reported data from companies. This is where MioTech has an advantage in enhancing depth and breadth of company coverage, thanks to its AI engine that scouts alternative data daily and systematically.
How should institutional investors evaluate asset managers in terms of ESG capability?
In short, the two flags I would watch for are “bluewashing” and “greenwashing.”
It’s not enough to register as a PRI signatory yet not proactively bring the majority of AUM under its principles– that’s bluewashing. Quality impact reporting is also critical, otherwise the asset manager risks a poor reputation of greenwashing its ESG offering as a marketing ploy.
A sample of questions I ask asset managers include:
• How do your analysts collect non-reported data and draw conclusions from the data collected?
• How is this incorporated into your portfolio construction? (80% respond with a “black box” approach.)
• Who can override ESG criteria in portfolio inclusion and position weighting?
• How is ESG impact measured and reported in this fund? (For instance, carbon emissions intensity)
At the end of the day, I want to gauge from this fund manager: do they match my passion for this field of investing?
What surprises you the most about the evolution of financial markets in China?
Chinese financial markets have mounted a steep learning curve since China opened to the world in 1979, but China has progressed extraordinarily fast and the growth of its asset management industry well exceeded the pace seen in other developing markets. This is the first surprise, though it may also come as no surprise in light of the government’s centralized management approach.
Secondly, the Chinese asset management space is in fact a maturing market, with major international players jumping onshore to partner in joint ventures with local financial institutions to amass market share in this growing economy. Some of these global players are taking majority ownership.
This trend presents an excellent opportunity for new companies which deploy differentiated methods to structure ESG products and train members in climate finance in order to grow a new ecosystem of values-based investing. These talents could lie in policymaking, asset allocation, portfolio management, and data generation.
Looking ahead, Yaozhi’s aspiration lies in playing a leading role in ESG fund management as we contribute to an orderly transition to a better economy by environmental, social, and governance standards.
Special thanks to Melissa Zhang for her contribution to this article.
References:
1. https://www.asiaasset.com/post/22971-china-southern-am-1218
2. https://www.chinawaterrisk.org/opinions/top-10-responsible-investment-trends-in-china-in-2020/
3. https://www.unpri.org/searchresults?qkeyword=china&PageSize=10¶metrics=WVSECTIONCODE%7C1018&cmd=ReplaceKeyword&val=china
4. https://www.climatebonds.net/resources/reports/china-green-bond-market-2019-research-report
5. https://www.chinawaterrisk.org/opinions/top-10-responsible-investment-trends-in-china-in-2020/
6. https://www.hkex.com.hk/News/Regulatory-Announcements/2020/200724news?sc_lang=en
7. https://www.gpif.go.jp/en/investment/pdf/summary_report_GPIFs_stewardship_activities_in_2016.pdf