From the outside, it may be hard to imagine China as an emerging leader in sustainable business practices. For one, it remains one of the world’s top carbon emitters. Yet, at the same time, it is one of the world’s largest renewable energy producers and electric vehicle markets.1 On the ground, awareness of environmental, social, and governance (ESG) best practices is growing among Chinese companies, largely driven by regulatory policies. Notably, some companies are integrating ESG practices across their businesses and deploying technological advances such as artificial intelligence (AI) and big data to amplify their impact, which may affect millions of people. Yet in this vast market, it is also not surprising to see variation in companies’ ESG performance.
The challenge for investors is how to see through the layers of ESG changes in China and recognize the drivers of opportunities to come. Here, we cover three areas that will shape the development of ESG in the world’s second-largest economy.
In doing so, we will highlight examples of ESG business activities where government leadership, entrepreneurial drive, and technological prowess intersect, potentially forming the next alpha frontier in China. Aside from our own research and point of view, we sought perspectives from Gobi Partners, a Pan-Asian venture capital firm helping to power entrepreneurial startups. Like many other emerging developments in the Chinese economy, ESG developments may appear limited or unsystematic on the surface, but the scale and speed of transformation may indicate a much larger opportunity lying beneath.
Among the ESG factors, the “E” has taken on greater prominence in China as environmental protection became a government priority, part of China’s structural shift toward sustainable growth. In recent years, a string of new policies nudged companies to comply with stricter environmental standards.
Capital has emerged as a key lever to drive environmental change – including financing not only for companies in environmentally linked sectors, such as renewable energy, but also those in traditional industries that are seeking to “green” their operations, for example by adopting energy-efficient processes. Various government subsidies and incentives have been put in place, and in 2016, seven ministries and regulators issued the Guidelines for Establishing the Green Financial System, which paved the way for development of the green bond market.2
Banks, the primary source of credit in China, have also increasingly recognized the financial opportunity in green financing products, as well as the financial and reputational risks associated with lending to companies whose activities cause environmental damage.
In just four years, China has become the world’s second-largest issuer of green bonds after the US, raising US$31.34 billion in 2019.3
Source: Climate Bonds Initiative as of February 2020. For illustrative purposes only. We are not soliciting or recommending any action based on this material.
The majority of Chinese green bond proceeds have been used to finance projects in low-carbon transport, renewable energy, and sustainable water.4 Internationally aligned Chinese green bonds, however, are still a small fraction of total global green bonds. That said, steps are being taken to harmonize local standards with globally accepted taxonomy, which we believe should enhance the market’s attractiveness to foreign investors.
Green financing has become an important enabler of ESG adoption – perhaps representing the tip of the “ESG iceberg” in China – and its rapid growth signals the extent of change still underway.
“In China, interest and developments on the ESG front have experienced a step change, with both government and social pressure fueling the need for companies and investors to systematically include ESG-related considerations across the board,” says Chibo Tang, a partner of Gobi Partners China, based in Hong Kong and overseeing the Greater Bay Area region in China (see below).
ESG performance can be defined and manifested in different ways: internally, through better operational processes, such as by improving corporate governance or hiring a more diverse workforce; or externally, through products and services that promote sustainability in the broader community.
Perhaps no other industry has exemplified the ability to do both in China better than the technology sector. With their international exposure and foreign shareholders, some Chinese technology companies are setting the tone on ESG adoption by incorporating their sustainability objectives into their business objectives. A Chinese e-commerce giant, for instance, focuses on seven sustainability priority areas: corporate governance, intellectual property rights, cyber security, data protection, human capital, environmental impact, and social impact.5 And with hundreds of millions of users, the ability to roll out new products and services quickly, and the capacity to change mass consumer behavior, these tech companies are deepening and expanding ESG’s impact on society.
Technological prowess can also be used to narrow gaps in sustainability areas, such as health care, financial inclusion, and carbon emissions reduction. And given these companies’ vast networks, the multiplier effect of their activities on the rest of the economy could be exponential.
The explosion of fintech in China in recent years has helped extend financial services to a multitude of people faster than ever, thereby jumpstarting more economic activities, creating new jobs, and helping address rural poverty. For instance, the ubiquitous WeChat app has in many ways become an economic universe of its own, creating over 29 million job opportunities in 2019.6 Used by more than a billion people,7 it is a unique ecosystem offering messaging, e-commerce, payment, and other services.
Digital technology has also bridged location limitations to enable small entrepreneurs from across China to join the digital economy. An e-commerce company leveraged its sprawling retail platform to help entrepreneurs in rural areas start their own businesses online.8 And the use of AI, cloud computing, and big data enabled a digital bank to approve small unsecured loans to individuals and small enterprises via WeChat in under five seconds. Facial recognition technology is used to fulfill the regulatory “know your customer” requirements. For a majority of the bank’s small and medium enterprise (SME) borrowers, it was their first time receiving a loan from a financial institution.9
With second- and third-tier cities expected to be engines of the next wave of growth in China, these digital connections are shaping up to be important facilitators of more inclusive economic development.
Bringing high-quality health care services to rural areas using AI and big data has the potential to save countless lives and complement the capability and reach of the public health care system. A large insurance group offers AI-assisted diagnostic and treatment services to rural areas via a “village doctor” version of its popular healthcare app.10 Another company’s efforts to digitize China’s health care system led to a WeChat-based digital health care card, which offers lifelong and secure medical records for patients that can be used in different hospitals across the country, while its AI-based medical image analysis technology helps increase the accuracy of early-stage cancer diagnosis and has been used to assist in Covid-19 diagnosis.11
Companies are also using technology to nudge people to adopt more sustainable practices or socially responsible behavior. Users of one of China’s largest digital payment platform can collect “green energy points” for adopting a low-carbon lifestyle, for example by using e-payments instead of paper invoices and taking public transportation, biking, or walking instead of driving. They can then donate these points toward the planting of trees in China’s arid areas. Tapping into the power of social networking, users can also share their progress via social media and keep track of progress in real time. As of May 2020, over 500 million users had helped plant 200 million trees, and the initiative had also generated over 650,000 job opportunities for local communities.12
More recently, digital technology has taken on a greater social purpose during the coronavirus outbreak. Services such as an “anti-pandemic express services” – a dedicated section in the payment app that aggregates services that provide real-time updates, online medical consultations, online grocery delivery services, and others – have helped millions of users avoid leaving their homes during the outbreak.13 Perhaps one of the biggest technology-enabled changes in people’s lives in China after Covid-19 is the use of color-coded health code apps to verify citizens’ health status and travel history. Citizens must use the codes generated by the apps as an e-access pass to enter buildings or travel within the country. Developed and rolled out just weeks after the lockdown in Wuhan, the apps are examples of how technology played a critical role in China’s virus containment effort.
As with product development cycles, monitoring the effectiveness of companies’ ESG programs informs their next steps. Using AI, a large insurance group mapped over 500 indicators from different regulatory agencies, automated data collection and monitoring of its own ESG performance, and accelerated its reporting process.14 The broader use of such technology should enable faster disclosure of information that would be actionable for market participants.
The above examples demonstrate how ESG has been integrated into the business offerings of some of China’s largest companies. Driven by customer needs and developed along business lines, ESG-related products and services no longer take the form of charitable or token undertakings; rather, they are financially material to the company, helping them maintain or increase customer relevance, brand loyalty, and market share in a highly competitive market. At the same time, these examples show how China’s technological advances can take ESG to a higher level, creating new opportunities for investors.
ESG investing is still in its early stages in China compared with the EU and the US, but shifts in investor attitudes could speed up the trend – especially as more foreign investors participate in the A-share market and as a new generation of sustainability-conscious Chinese investors gains prominence.
This evolving landscape opens up opportunities for investors seeking to capitalize on this transformation at the company level. To find the companies that are genuinely making meaningful changes, data is key.
“ESG by nature is hard to quantify and measure, as traditional and discrete metrics such as financial indicators do not paint a full picture,” says Tang, of Gobi Partners China. “Data that can be used to evaluate ESG performance is difficult to collect and analyze – only the application of technology can provide the tools and frameworks with which to do so. There are many startups spread across various industry sectors utilizing AI, blockchain, cloud solutions, connected devices, and more to address either very specific industry problems or broader ecosystem issues.”
Traditional ESG data come largely from companies’ voluntary or mandatory disclosures to regulators and exchanges. Disclosure among larger companies has steadily improved: over 80% of CSI 300 constituents now voluntarily report on their ESG performance.15 However, the quality of disclosures may vary. Standardized, comprehensive, and material ESG information disclosure can allow the market to better assess – and price – a company’s risk.
Source: SynTao Green Finance, Ping An as of June 2020. For illustrative purposes only. We are not soliciting or recommending any action based on this material.
In this area, technology also offers powerful tools for investors to complement voluntary or mandatory disclosures. One company is deploying its own microsatellites into space to provide real-time data through imagery. It is embedding microchips in the satellites themselves so they can perform machine-learning processes faster.16 Another data provider company also offers data from proxy variables of economic activities. By inspecting land surface temperature and nitrogen dioxide emissions, it was able to offer a picture of the coronavirus’ impact on economic activities.17
With its sheer size, China has the potential to be a game-changer in global sustainability investing. The building blocks are in place: a growing green credit market that is encouraging companies to invest in ESG-related projects; strategic government policies; and companies that are eager to leverage technological advances to amplify the impact.
Given the potential scale of ESG-driven changes at the enterprise level, investors in China will likely see ESG practices emerge as a valuable source of alpha potential over the long term. Yet in China’s idiosyncratic market, these opportunities may not always be easy to discern. Therefore, a rigorous evaluation of these opportunities, informed by local knowledge and experience, will be key. In our view, sustainability should not be a point-in-time measure, but a long-term value creator – and may offer tangible benefits to investors.
1 International Energy Agency, October 2019; McKinsey, July 2020; Climate Watch data, accessed on 20 July 2020.
2 People’s Bank of China, September 2016. http://www.pbc.gov.cn/english/130721/3131759/index.html; Tsinghua University National Institute of Financial Research, March 2020. http://www.pbcsf.tsinghua.edu.cn/upload/default/20200321/154d214ec2b61acb33518e01819e1b5b.pdf
3 Climate Bonds Initiative as of February 2020. https://www.climatebonds.net/resources/reports/2019-green-bond-market-summary
4 China Green Bond Market Report 2018. https://www.climatebonds.net/files/reports/china-sotm_cbi_ccdc_final_en260219.pdf
5 Alibaba 2018 ESG Report
6 South China Morning Post, 15 May 2020. https://www.scmp.com/tech/enterprises/article/3084585/tencents-wechat-app-creates-millions-new-jobs-chinas-digital
7 WeChat, 18 May 2020. https://www.prnewswire.com/news-releases/wechat-releases-new-report-on-the-qr-code-economys-fight-against-covid-19-301060807.html
8 Alibaba 2018 ESG Report
9 WeBank, Forrester Research, 31 October 2019. https://www.prnewswire.com/in/news-releases/webank-the-world-s-leading-digital-bank-decoded-811666527.html
10 Ping An 2018 Sustainability Report. http://www.pingan.cn/app_upload/file/official/2018ESGReport_EN.pdf
11 Tencent, as of 21 February 2020, https://www.tencent.com/en-us/articles/2200960.html; Tencent Corporate Social Responsibility Report, 2019.
12 Alipay Sustainability Report 2019-2020, https://gw.alipayobjects.com/os/bmw-prod/e39c99c2-0193-40fc-8265-cf4f72a8367e.pdf
13 Alipay Sustainability Report 2019-2020, https://gw.alipayobjects.com/os/bmw-prod/e39c99c2-0193-40fc-8265-cf4f72a8367e.pdf
14 Ping An Sustainability Report 2018. http://www.pingan.cn/app_upload/file/official/2018ESGReport_EN.pdf
15 Syntao Green Finance, 14 January 2020. http://www.syntaogf.com/Menu_Page_EN.asp?ID=21&Page_ID=327
16 DigiFin, 20 January 2020. https://www.digfingroup.com/webank-esg/
17 MioTech, 13 March 2020. https://www.miotech.com/en-US/insights/article/5e69fee54dfdef0040211f58
18 Gobi Partners, as of 30 June 2020.
19 South China Morning Post,27 April 2020. https://www.scmp.com/tech/apps-social/article/3081625/autox-alibabas-autonavi-roll-out-robotaxis-shanghais-ride-hailing
Investing involves risk, including possible loss of principal. The information presented herein is for illustrative purposes only and should not be considered reflective of any particular security, strategy, or investment product. It represents a general assessment of an individual market topic at a specific time and is not a guarantee of future performance results or market movement nor is it an endorsement of any particular focus, mandate or strategy. This material does not constitute investment, financial, legal, tax, or other advice; investment research or a product of any research department; an offer to sell, or the solicitation of an offer to purchase any security or interest in a fund; or a recommendation for any investment product or strategy. PineBridge Investments is not soliciting or recommending any action based on information in this document. Any views, opinions, projections, forecasts or forward-looking statements expressed herein are solely those of the author, may differ from those expressed by other individuals or areas of PineBridge Investments, are inherently speculative, are only for general informational purposes, and are valid only as of the date indicated. Content may be based on third-party data that has not been independently verified. PineBridge Investments does not approve of or endorse any re-publication or sharing of this material. You are solely responsible for deciding whether any investment product or strategy is appropriate for you based upon your investment goals, financial situation and tolerance for risk.
PineBridge Investments is a group of international companies that provides investment advice and markets asset management products and services to clients around the world. PineBridge Investments is a registered trademark proprietary to PineBridge Investments IP Holding Company Limited.
Readership: This document is intended solely for the addressee(s) and may not be redistributed without the prior permission of PineBridge Investments. Its content may be confidential, proprietary, and/or trade secret information. PineBridge Investments and its subsidiaries are not responsible for any unlawful distribution of this document to any third parties, in whole or in part.
Opinions: Any opinions expressed in this document represent the views of the manager, are valid only as of the date indicated, and are subject to change without notice. There can be no guarantee that any of the opinions expressed in this document or any underlying position will be maintained at the time of this presentation or thereafter. We are not soliciting or recommending any action based on this material.
Risk Warning: All investments involve risk, including possible loss of principal. If applicable, the offering document should be read for further details including the risk factors. Our investment management services relate to a variety of investments, each of which can fluctuate in value. The investment risks vary between different types of instruments. For example, for investments involving exposure to a currency other than that in which the portfolio is denominated, changes in the rate of exchange may cause the value of investments, and consequently the value of the portfolio, to go up or down. In the case of a higher volatility portfolio, the loss on realization or cancellation may be very high (including total loss of investment), as the value of such an investment may fall suddenly and substantially. In making an investment decision, prospective investors must rely on their own examination of the merits and risks involved.
Performance Notes: Past performance is not indicative of future results. There can be no assurance that any investment objective will be met. PineBridge Investments often uses benchmarks for the purpose of comparison of results. Benchmarks are used for illustrative purposes only, and any such references should not be understood to mean there would necessarily be a correlation between investment returns of any investment and any benchmark. Any referenced benchmark does not reflect fees and expenses associated with the active management of an investment. PineBridge Investments may, from time to time, show the efficacy of its strategies or communicate general industry views via modeling. Such methods are intended to show only an expected range of possible investment outcomes, and should not be viewed as a guide to future performance. There is no assurance that any returns can be achieved, that the strategy will be successful or profitable for any investor, or that any industry views will come to pass. Actual investors may experience different results.
Information is unaudited unless otherwise indicated, and any information from third-party sources is believed to be reliable, but PineBridge Investments cannot guarantee its accuracy or completeness.
This document and the information contained herein does not constitute and is not intended to constitute an offer of securities or provision of financial advice and accordingly should not be construed as such. The securities and any other products or services referenced in this document may not be licensed in all jurisdictions, and unless otherwise indicated, no regulator or government authority has reviewed this document or the merits of the products and services referenced herein. This document and the information contained herein has been made available in accordance with the restrictions and/or limitations implemented by any applicable laws and regulations. This document is directed at and intended for institutional and qualified investors (as such term is defined in each jurisdiction in which the security is marketed). This document is provided on a confidential basis for informational purposes only and may not be reproduced in any form. Before acting on any information in this document, prospective investors should inform themselves of and observe all applicable laws, rules and regulations of any relevant jurisdictions and obtain independent advice if required. This document is for the use of the named addressee only and should not be given, forwarded or shown to any other person (other than employees, agents or consultants in connection with the addressee’s consideration thereof).
Australia: PineBridge Investments LLC is exempt from the requirement to hold an Australian financial services license under the Corporations Act 2001 (Cth) in respect of the financial services it provides to wholesale clients, and is not licensed to provide financial services to individual investors or retail clients. Nothing herein constitutes an offer or solicitation to anyone in or outside Australia where such offer or solicitation is not authorised or to whom it is unlawful. This information is not directed to any person to whom its publication or availability is restricted.
Brazil: PineBridge Investments is not accredited with the Brazilian Securities Commission - CVM to perform investment management services. The investment management services may not be publicly offered or sold to the public in Brazil. Documents relating to the investment management services as well as the information contained therein may not be supplied to the public in Brazil.
Chile: PineBridge Investments is not registered or licensed in Chile to provide managed account services and is not subject to the supervision of the Comisión para el Mercado Financiero of Chile (“CMF”). The managed account services may not be publicly offered or sold in Chile.
Colombia: This document does not have the purpose or the effect of initiating, directly or indirectly, the purchase of a product or the rendering of a service by PineBridge Investments ("investment adviser") to Colombian residents. The investment adviser’s products and/or services may not be promoted or marketed in Colombia or to Colombian residents unless such promotion and marketing is made in compliance with decree 2555 of 2010 and other applicable rules and regulations related to the promotion of foreign financial and/or securities related products or services in Colombia. The investment adviser has not received authorisation of licensing from The Financial Superintendency of Colombia or any other governmental authority in Colombia to market or sell its financial products or services in Colombia. By receiving this document, each recipient resident in Colombia acknowledges and agrees that such recipient has contacted the investment adviser at its own initiative and not as a result of any promotion or publicity by the investment adviser or any of its representatives. Colombian residents acknowledge and represent that (1) the receipt of this presentation does not constitute a solicitation from the investment adviser for its financial products and/or services, and (2) they are not receiving from the investment adviser any direct or indirect promotion or marketing of financial products and/or services. Marketing and offering of products and/or services of a foreign financial [or securities related] entity represented in Colombia.
Promoción y oferta de los negocios y servicios de la entidad del mercado de valores del exterior [o financiera, según sea el caso] representada en Colombia.
Dubai: PineBridge Investments Europe Limited is regulated by the Dubai Financial Services Authority as a Representative Office.
Germany: PineBridge Investments Deutschland GmbH is authorised and regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin).
Hong Kong: The issuer of this document is PineBridge Investments Asia Limited, a company incorporated in Bermuda with limited liability, licensed and regulated by the Securities and Futures Commission (SFC). This document has not been reviewed by the SFC.
Ireland: Approved by PineBridge Investments Ireland Limited. This entity is authorised and regulated by the Central Bank of Ireland.
Israel: PineBridge Investments is neither licensed nor insured under the Israeli Investment Advice Law.
Japan: This document is not, and under no circumstances is to be considered as, a public offering of securities in Japan. No registration pursuant to Article 4 paragraph 1 of Japan’s Financial Instruments and Exchange Act (“FIEA”) has been or will be made with respect to any solicitation of applications for acquisition of interests of any vehicle or any account that may be undertaken, on the grounds that any such solicitation would constitute a “solicitation for qualified institutional investors” as set forth in Article 23-13, paragraph 1 of the FIEA. In Japan, this document is directed at and intended for qualified institutional investors (as such term is defined in Article 2, paragraph 3, item 1 of the FIEA; “QIIs”). If any offering is to be made, that would be made on the condition that each investor enters into an agreement whereby the investor covenants not to transfer its interests (i) to persons other than QIIs, or (ii) without entering into an agreement whereby the transferee covenants not to transfer its interests to persons other than QIIs.
Kuwait: The offering of any security in any vehicle has not been approved or licensed by the Kuwait Capital Markets Authority or any other relevant licensing authorities in the State of Kuwait, and accordingly does not constitute a public offer in the State of Kuwait in accordance with Law no. 7 for 2010 regarding the Establishment of the Capital Markets Authority and the Regulating Securities Activities (“CMA Law”). This document is strictly private and confidential and is being issued to a limited number of professional investors: A) who meet the criteria of a Professional Client by Nature as defined in Article 2-6 of Module 8 of the Executive Regulations No. 72 of 2015 of the CMA Law; B) upon their request and confirmation that they understand that the securities have not been approved or licensed by or registered with the Kuwait Capital Markets Authority or any other relevant licensing authorities or governmental agencies in the State of Kuwait; and must not be provided to any person other than the original recipient, and may not be reproduced or used for any other purposes whatsoever.
Malaysia: PineBridge Investments Malaysia Sdn Bhd is licensed and regulated by Securities Commission of Malaysia (SC). This material is not reviewed or endorsed by the SC.
Peru: Specifically, the Interests will not be subject to a public offering in Peru. The Interests described herein have not been and will not be approved by or registered with the Peruvian Superintendency of Capital Markets (Superintendencia del Mercado de Valores, or the “SMV”) or the Lima Stock Exchange (Bolsa de Valores de Lima). Accordingly, the Interests may not be offered or sold in Peru except, among others, if such offering is considered a private offer under the securities laws and regulations of Peru. The Interests cannot be offered or sold in Peru or in any other jurisdiction except in compliance with the securities laws thereof. In making an investment decision, institutional investors (as defined by Peruvian law) must rely on their own examination of the terms of the offering of the Interests to determine their ability to invest in the Interests. All content in this document is for information or general use only. The information contained in this document is referential and may not be construed as an offer, invitation or recommendation, nor should be taken as a basis to take (or stop taking) any decision. This document has been prepared on the basis of public information that is subject to change. This information may not be construed as services provided by PineBridge Investments within Peru without having the corresponding banking or similar license according to the applicable regulation.
Singapore: PineBridge Investments Singapore Limited is licensed and regulated by the Monetary Authority of Singapore (MAS). In Singapore, this material may not be suitable to a retail investor and is not reviewed or endorsed by the MAS.
Switzerland: In Switzerland, PineBridge Investments Switzerland GmbH classes this communication as a financial promotion and is solely intended for professional investors only.
Taiwan: PineBridge Investments Management Taiwan Ltd. Is licensed and regulated by Securities and Futures Bureau of Taiwan (SFB). In Taiwan, this material may not be suitable to investors and is not reviewed or endorsed by the SFB.
United Kingdom: PineBridge Investments Europe Limited is authorised and regulated by the Financial Conduct Authority (FCA). In the UK this communication is a financial promotion solely intended for professional clients as defined in the FCA Handbook and has been approved by PineBridge Investments Europe Limited. Should you like to request a different classification, please contact your PineBridge representative.
Uruguay: The sale of the securities qualifies as a private placement pursuant to section 2 of Uruguayan law 18.627. The issuer represents and agrees that it has not offered or sold, and will not offer or sell, any securities to the public in Uruguay, except in circumstances which do not constitute a public offering or distribution under Uruguayan laws and regulations. The securities are not and will not be registered with the Central Bank of Uruguay to be publicly offered in Uruguay. The securities correspond to investment funds that are not investment funds regulated by Uruguayan law 16,774 dated 27 September 1996, as amended.
As of 31 March 2020